There’s a reason millionaires across the country are shaking in their boots right now. President Biden recently revealed the details of a tax proposal that, if passed, could leave the wealthy on the hook for a much higher IRS liability.
For one thing, Biden is seeking to raise the top marginal tax rate from 37% to 39.6% for the country’s highest earners. He’s also looking to raise capital gains taxes so that the wealthy no longer benefit from holding investments for at least a year and a day.
Investments held for that period at a minimum get pushed into what’s currently a more favorable long-term capital gains tax rate that maxes out at 20% for higher earners (most people pay 15%). On top of that, there’s a net investment tax of 3.8% that applies to the wealthy. Biden is seeking to tax long-term capital gains at the highest marginal rate he’s proposing — 39.6%. When we tack on the 3.8% surtax, that brings taxable gains up to 43.4% for the rich.
The goal of all of these tax changes is to help fund the president’s American Families Plan — a plan that includes billions in investments for subsidized child care, universal preschool for 3- and 4-year-olds, and an enhanced paid family and medical leave program, among other provisions. But what’s absent from his recent tax proposal is a means of saving Social Security from the shortfall it’s facing.
Will Social Security taxes go up?
Right now, workers pay Social Security taxes on their first $142,800 of earnings. In the course of his presidential campaign, Biden had talked about raising Social Security taxes on workers earning over $400,000. Specifically, his idea was to keep the current $142,800 wage cap in place, but then reinstate a tax on earnings once they surpassed the $400,000 mark. As is the case with the proposals mentioned above, Biden’s goal is to not raise taxes on average or even moderate earners. Rather, he’s only looking to have the wealthy pay more.
But in announcing his recent round of tax changes, Biden made no mention of Social Security or an increase in taxes on higher earners to better fund the program. Now, this doesn’t mean that his plan to impose taxes on wages exceeding $400,000 is off the table — but it is interesting that it really didn’t come up much in the context of major tax changes.
Meanwhile, about a year ago, the Social Security Trustees estimated that the program’s trust funds could run dry by 2035, and once that happens, benefit cuts may be on the table. Imposing more Social Security taxes on workers earning over $400,000 could help prevent that shortfall. Of course, that projection on the part of the Trustees was made before the pandemic really took hold. Over the past year, Social Security has lost a lot of tax revenue, which could speed up that 2035 timeline.
As such, the fact that Biden’s recent tax proposal does not address Social Security is a bit surprising — but that doesn’t mean it’s off the table. Higher earners may still want to brace for the possibility of losing more of their income to taxes in the not-so-distant future.