White House gears up for political fight over tax rises on wealthy

Joe Biden’s top economic adviser said there was no evidence that raising capital gains taxes would hurt long-term investment in the US economy, as the White House gears up for a months-long political fight over its plans to impose higher levies on the wealthy to fund a massive increase in spending.

Speaking to reporters at the White House on Monday, Brian Deese, director of the National Economic Council, said that there had been “no correlation” between capital gains tax rates and investment or overall economic growth over the past 30 or 40 years.

“Across a wide body of academic and empirical evidence, there is no evidence of a significant impact of capital gains rates on the level of long-term investment in the economy,” Deese said.

“There’s lots of reasons for that, including that if you look at where a lot of venture capital and early stage investment comes from, it actually comes from pension funds, sovereign wealth funds [and] entities that actually are not tax sensitive. Also because, at the end of the day, a lot of things go into making an investment decision,” he added.

Biden is this week expected to propose a new economic package possibly worth more than $1.5tn in government funding for child care, paid leave, and education programmes, including universal access to pre-kindergarten classes. The plan will be rolled out as Biden delivers his first address to a joint session of Congress, on the eve of his 100th day as president.

To pay for the package, the White House is proposing to sharply raise taxes on the wealthiest Americans, including a near doubling of levies on capital gains and dividends for tax filers earning more than $1m per year, placing it on a collision course with Wall Street and Silicon Valley.

Any plan would have to be approved by lawmakers, which could be a tall order given the slim Democratic majorities on Capitol Hill and a bulging economic agenda that also includes a $2.5bn infrastructure plan partly funded by corporate tax increases.

The White House is not only expected to face fierce resistance from Republicans over the planned capital gains tax rises, but also potentially some scepticism from moderate Democrats in swing districts and even liberal Democrats from wealthy urban regions and states. Business groups are also likely to lobby intensely against any increase.

The Biden administration is betting that tax increases on the very wealthy will not be as politically toxic as feared, and could even prove popular in the wake of the big gains in equity markets recorded by the richest households in America during the coronavirus pandemic.

Biden administration officials will also stress that any hit to wealthy families, accounting for just 0.3 per cent of tax filers, will be outweighed by the advantages of the spending plan, which Deese said would boost “labour force participation and future economic competitiveness”.

Deese noted that former Republican president Ronald Reagan had championed the equalisation of capital gains tax rates with ordinary income rates, which is what the Biden administration is attempting to do.

However, while Reagan lifted rates to 28 per cent, Biden wants to raise capital gains taxes for high earners from 20 per cent to 39.6 per cent, rising to 43.4 per cent if a healthcare surtax on investment income is included.

Deese, a former Obama administration economic official, also noted that Warren Buffett, the investor, had backed an equalisation of the two rates, on the grounds that he should not be paying a higher percentage than his secretary.