In less than two months, voters will cast their choice in the Iowa caucus to begin the process of selecting the next Democratic presidential candidate. The candidates currently in the top 3 polling positions—former Vice President Joe Biden, Senator Elizabeth Warren (D-MA), and Senator Bernie Sanders (I-VT)—have all proposed sweeping changes to the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code, especially the taxation of capital gains and dividends.
Many Democratic presidential candidate proposals have focused on taxing high-income taxpayers’ accrued wealth and income, including capital gains. The tax code currently taxes any increase in a capital asset’s price over the asset’s basis when the asset is sold (or a realized capital gain), deferring taxation until the sale of the asset.
Capital assets can include everything from assets traded frequently in financial markets like stocks, to assets that are sold less frequently, like jewelry or art. Capital gains are taxed when they are realized, instead of every year on their accrued value. Investors can also deduct up to $3,000 in capital losses from their taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. in the year the loss occurred, and can carry forward losses in excess of $3,000 to offset taxable income in future years.
Capital gains that are realized within a year (“short-term” capital gains) are taxed at the same statutory rates as ordinary income, but long-term capital gains (realized after one year) are taxed at lower rates: 0 percent, 15 percent, and 20 percent, depending on the filer’s taxable income (see Figure 1). The Affordable Care Act also created a Net Investment Income Tax, which imposes an additional 3.8 percent tax on the long-term capital gains of single filers who have a modified adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” (MAGI) of higher than $200,000, and married filers with a MAGI of more than $250,000.
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Source: “2020 Tax Brackets,” Tax Foundation and IRS Topic Number 559 |
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| For Unmarried Individuals | For Married Individuals Filing Joint Returns | For Heads of Households | ||
|---|---|---|---|---|
| Taxable Income Over | ||||
| 0% | $0 | $0 | $0 | |
| 15% | $40,000 | $80,000 | $53,600 | |
| 20% | $441,450 | $496,600 | $469,050 | |
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Additional Net Investment Income Tax |
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| 3.8% | MAGI above $200,000 | MAGI above $250,000 | MAGI above $200,000 | |
This is where the top three Democratic presidential candidates stand on taxing capital gains and dividends:
Former Vice President Joe Biden
Biden has proposed taxing capital gains at ordinary income tax rates for taxpayers earning more than $1 million annually. He has also proposed increasing the top marginal income tax rate to 39.6 percent. When this is added to the Net Investment Income Tax (3.8 percent) on married filers (which phases in at $250,000 MAGI), the marginal tax rate on capital gains reaches 43.4 percent. Biden’s proposed changes would only affect filers in the top long-term capital gains bracket. Under Biden’s plan, the top rate on long-term gains would nearly double from 23.8 percent to 43.4 percent.
| Income (Married Filing Jointly) | Current Law | Biden Plan |
|---|---|---|
| $0 to $78,749 | 0% | 0% |
| $78,750 to $250,000 | 15% | 15% |
| $250,001 to $488,849 | 18.8% | 18.8% |
| $488,850 to $999,999 | 23.8% | 23.8% |
| $1,000,000 and above | 23.8% | 43.4% |
Senator Elizabeth Warren (D-MA)
Warren proposes taxing capital gains as ordinary income for the top 1 percent of taxpayers, raising the rate on capital gains from 23.8 percent to 39.6 percent for those in the top 1 percent of income earners in the United States. (In tax year 2017, the AGI threshold to be in the top 1 percent was $515,371.) She would also levy a new tax of 14.8 percent on investment income on individuals making more than $250,000 and couples more than $400,000.
| Income (Married Filing Jointly) | Current Law | Warren’s Plan |
|---|---|---|
| $0 to $78,749 | 0% | 0% |
| $78,750 to $250,000 | 15% | 15% |
| $250,001 to $400,000 | 18.8% | 18.8% |
| $400,001 to $488,849 | 18.8% | 33.6% |
| $488,850 to Top 1% Threshold | 23.8% | 38.6% |
| Top 1% | 23.8% | 58.2% |
Warren’s plan reaches a top marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. on capital gains of 58.2 percent. Additionally, she has proposed a “mark-to-market” taxation regime on capital gains for the top 1 percent of households. Mark-to-market taxation requires taxpayers to pay tax on their capital gains every year rather than waiting to pay tax until the assets are realized or sold. Warren’s proposal increases marginal tax rates on filers with incomes above $250,000, more than doubling the marginal rate for those in the top 1 percent.
Senator Bernie Sanders (I-VT)
Sanders’ proposal would tax capital gains at the same rate as ordinary income for taxpayers with household income of $250,000 and above, which is where the current Net Investment Income Tax (NIIT) phases in. Importantly, Sanders’ plan would raise marginal tax rates from current law, creating four new tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. : 40 percent on income between $250,000 and $500,000, 45 percent on income between $500,000 and $2 million, 50 percent on income between $2 million and $10 million, and 52 percent on all income over $10 million. Additionally, Sanders has proposed a 4 percent income-based premium on household income above $29,000, which we assume also applies to capital gains income.
| Income (Married Filing Jointly) | Current Law | Sanders Plan (Includes Income-Based Premium) |
|---|---|---|
| $0 to $29,000 | 0% | 0% |
| $29,001-$78,749 | 0% | 4% |
| $78,750 to $250,000 | 15% | 19% |
| $250,001 to $488,849 | 18.8% | 47.8% |
| $488,850 to $500,000 | 23.8% | 47.8% |
| $500,001 to $2 million | 23.8% | 52.8% |
| $2 million to $10 million | 23.8% | 57.8% |
| $10 million and above | 23.8% | 59.8% |
Sanders’ plan taxes capital gains at the same rate as ordinary income for taxpayers with income of $250,000 and above. If his income-based premium on household income includes capital gains income, taxpayers who do not currently pay taxes on their capital gains could owe a 4 percent tax on their gains under his plan. Under Sanders’ plan, top marginal rates could reach 59.8 percent compared to current law, which peaks at 23.8 percent. Sanders’ plan would almost double marginal tax rates on all incomes between $250,000 and $2 million and more than double marginal tax rates on those with incomes above $2 million.
Similar Proposals with Contrasting Specifics
Biden, Warren, and Sanders would all tax capital gains at ordinary income tax rates for higher-income taxpayers. Biden’s proposal is the least progressive and contains the smallest marginal rate increase of the three candidates. Warren’s proposal features the highest marginal rate and would change the way gains are taxed for the top 1 percent. Sanders’ plan contains the most rate changes and affects taxpayers with lower levels of income than the other proposals.
Conclusion
With the first Democratic primary just around the corner, Biden, Sanders, and Warren have staked out similar plans to increase capital gains taxes on the wealthiest Americans. While all three candidates have called for taxing capital gains at ordinary income rates, the phase-in levels and top marginal tax rates vary.
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