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This is how Biden’s 40% capital gains tax could reduce $34 trillion national debt

This is how Biden's 40% capital gains tax could reduce $34 trillion national debt

President Joe Biden stirred controversy in late April when he unveiled plans to significantly increase capital gains taxes and even introduce taxation of unrealized gains.

Indeed, the plan would provide for significant changes as – with an upper bound at 44.6% – it would be the highest rate ever, even beating President Jimmy Carter’s 40% in the late 1970s.

Nonetheless, the plan is mostly aimed at increasing the rate paid by high-net-worth individuals, with the unrealized gains tax reportedly only affecting those whose wealth is greater than $100 million.

The likely effects of President Biden’s tax hike

The announcement also prompted the American University to examine the plan’s effects.

The study found that the impacts are likely to be generally positive, given that wealth inequality in the United States ensures that only a very small portion of the population would be affected.

Furthermore, it would do some work in reversing the upward wealth redistribution that has occurred in waves since the 2008 financial crisis with the latest big movement – reported as transferring some $50 trillion of wealth from the bottom 90% to the top 1% – during the COVID-19 pandemic.

The research also concluded that the tax hike would lead to stronger economic growth, increasing the gross domestic product (GDP) by 1% and government revenue by about 5%.

How Biden’s proposed tax hike could help with public debt

Another effect the proposed policy might have is reducing America’s skyrocketing public debt. An important factor – though far from the only one – linking low-tax environments with high borrowing is that governments – or at least politicians who desire reelection – simply can’t cut certain expenses.

In 2023, the U.S. government spent approximately $6.3 trillion, while its revenue amounted to about $4.44 trillion. Had the Biden tax plan been in effect during the fiscal year, and if the study’s estimates are correct, the deficit could have been reduced by $220 billion?

While such a figure appears like a drop in the ocean, given that the federal debt stood above $34 trillion as of the end of 2023, and some estimates place the rate of borrowing at $1 trillion every 100 days, the move could have compounding effects.

Not only could it reduce the rate at which the burden is taken, but the money could also be used on various projects and programs that could help economic growth outpace debt.

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