The Customer Effect

The White House is proposing an increase in the capital gains tax. What will non-white groups gain?

  • The White House is proposing a hike in capital gains tax as part of a deficit reduction plan.
  • The taxation system in America needs another look, so far the balance has been tipped in the favor of investors and white households. Will the capital gains tax rebalance the scales?

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The White House is proposing an increase in the capital gains tax. What will non-white groups gain?

As part of the $3 trillion deficit-reduction plan, President Joe Biden is proposing that capital gains tax be increased to 39.6% from its rate at 20%. But  who will  a higher capital gains tax impact the most? Let's find out. 

What is the capital gains tax? 

These types of taxes are levied upon the profits generated from the sales of assets like stocks, real estate, or even crypto. Only applicable after the asset is sold, the capital gains tax is calculated by deducting the original cost of an asset from its sale price. The proposed increase to 39.6% applies to those whose income totals to $1 million or above.

Behind the taxes:

In comparison to the wage and income tax, capital gains tax in the U.S. has historically been kept lower to encourage investor risk taking. Contrary to the arguments that investors need to be incentivized, many consider the unequal tax rates unfair to workers. The taxation system in America is not only the center of a lot of critique and political division but has until recently been relatively opaque. Since the Internal Revenue Service forms don't ask filers about their race, ethnicity or gender, it is close to impossible to accurately study how taxation impacts different demographics. 

At the start of this year, the US Treasury Department released its first analysis of tax return data by race and ethnicity. Note that that critics have long argued that tax benefits and the current taxation system unfairly favors white filers. But this study is the first tangible evidence and confirmation of this misalignment. 

Horizontal bar chart that shows how the capital gains tax compares to pass-through income or earned income tax credit. White families have a significantly higher tax breaks than non-white families.
Source: Bloomberg

For example, the study finds that the current 20% long term capital gains tax, advantages those with savings that can be invested. Incidentally, this demographic – those who save and invest – is highly skewed towards White Americans. According to the study, the average white family will have a net benefit of $1086 due to this rate in comparison to the $124 for Black families versus $131 for Hispanic families. 

Similarly misaligned, Black American families which make up 11% of all American families receive just 2% of the benefits from the current capital gains tax rate. 

And these benefits have a big wealth gap to fill in. While overall real family wealth has been growing since 1982, this growth has been more consistent for white families. The gap is significant as well. While non-white families have yet to touch the average $400,000 mark, white families began the race already way ahead of this ceiling. 

The gap between the two groups has been consistent as well, despite overall growth.

Line graph that shows the gap in real wealth along the lines of race and ethnicity.
Source: Federal Reserve Bank of St. Louis

What impact can the increase in capital gains tax have? 

Although the increase is expected to have a negative impact on the economy by deterring investors, many investors can avoid paying this tax if they hold on to their investments for longer. Similarly, calls for leveling the playing field between investors and waged workers finally seem to be getting a reply back. This new proposal may realign how tax benefits are distributed across the lines of race and ethnicity in America. 

But what if consumers want to avoid paying capital gains tax altogether? Other than holding on to an asset, one possible move can be trusting an investment portfolio to robo-advisors. The leading robo services leverage strategies like tax-loss harvesting. These can lower the amount investors would have to pay at the end of the tax year by pairing gains with losses automatically.

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