Wealthy Americans will avoid paying 90% of the estimated $1 trillion increase in investment taxes that President Joe Biden is proposing this week, according to new study from the University of Pennsylvania’s Wharton Business School.

The Wharton researchers concluded that tax avoidance, much of it legal, would cut nearly $900 billion of what the proposed increase on capital gains taxes could raise for the government.”We don’t think that the proposal has a lot of teeth,” said John Ricco, director of policy analysis at the Penn Wharton Budget Model, a non-partisan fiscal policy research group at the business school. “There are a lot of games you can play to avoid paying this tax.”
Mr. Biden in his first Congressional address on Wednesday is expected to propose a roughly $1.5 trillion package called the “American Family Plan” that would fund free prekindergarten education and community college tuition. It would also extend the child tax credit and create a national paid leave program.

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A key piece of paying for that: A near doubling of the tax that the very wealthy pay on the gains they make when they sell stocks and other investments. Right now that income, which is called capital gains, is taxed at 20% for most Americans. That’s lower than the rate that many Americans pay on the income they get from their job, and far less than the 37% that top earning Americans pay on their wages.Mr. Biden’s proposal is to eliminate the difference between the tax paid on wages and the tax paid on investment gains for those earning more than $1 million in any one year. The president is also expected to propose upping the top income tax rate to 39.6% from the current rate of 37%. That means equalizing the capital gains tax with the income tax would effectively double the tax rate on investment earnings to to 39.6% from the current 20%.
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But very few people, even among ultra-wealthy Americans, would end up paying the new higher tax, according to the Wharton researchers. The Wharton study found that Mr. Biden’s proposed capital gains tax increase in theory could generate up to $1 trillion in revenue in the next decade. (The White House says the proposed capital gains tax increase along with the proposed increase in the top tax rate for families earning more than $400,000 a year would generate $1.5 trillion in additional tax revenue over the next decade. The administration has not said how much of that would come from increasing capital gains taxes alone.)Mr. Biden’s higher capital gains taxes would only apply to people with income over $1 million. Wharton’s researchers, however, believe that once an increase in the capital gains rate is passed, wealthy Americans would simply avoid selling stocks and other investments. The wealthy could also minimize their taxes by paring gains in years when they have losses elsewhere in their portfolio, effectively lower their taxable net gains for the year. Another strategy could be to sell off investments slowly over time to minimize the amount of tax owed in any one year. “Capital gains is a discretionary tax,” said Ricco. “It is not like taxes you pay on income. You get to decide when you sell your investments, and therefore when you pay taxes or not.”

Loopholes for inherited incomeWhat’s more, under current rules, there is no capital gains on inherited income. That means the tax is basically wiped out when someone dies. But even if that loophole were closed, the Penn Wharton researchers concluded that wealthy Americans would only end up paying an additional $113 billion in taxes over the next decade.That’s a lot of money. But it’s far less than they would pay under other proposals to tax the rich. For example, Penn Wharton concluded earlier this year that Elizabeth Warren’s proposed wealth tax, which the richest Americans would pay every year on all of their assets no matter whether they sold their investments or not, would generate $3 trillion in new tax revenue over the next decade.Economist Dean Baker of the left-leaning Center for Economic and Policy Research said the Wharton researchers were likely correct when you look at the next decade, but not necessarily when looking further out than that. Baker said eventually rich people will have to sell their investments and pay the tax, as long as Mr. Biden’s proposal also ends the tax loophole that allows heirs to step-up the value of an estate tax-free after a person dies. Biden administration officials have indicated this week that the president plans to eliminate the step-up loophole in the estate tax.  “If these policies are paired, as [the president] is proposing, then you will be able to get most of the tax increase, even if the timing will be hard to predict.” Baker said. The Biden administration has said little about how tax avoidance might impact their capital gains tax proposal. But the president has proposed boosting the IRS’s audit budget by $80 billion over the next 10 years in order to better police what individuals, especially rich individuals, pay in taxes under existing laws. Wharton’s Ricco said he and his fellow researchers believe that raising capital gains taxes will almost entirely be paid by very wealthy Americans. He said it is a good policy if one is trying to address the U.S.’s growing inequality problem.”There are plenty of reasons why you would want to have capital gains taxed at the same rate of income, but raising revenue is not one of them,” said Ricco.