A study published by the University of Pennsylvania’s Wharton Business School revealed that the wealthiest U.S. citizens might be able to evade nearly 90 percent of taxes included in President Biden’s new proposal.
Biden’s tax proposal, inserted into President’s infrastructure bill, is meant to create the U.S. $1.7 trillion in tax revenue during the next decade.
The money is planned to be collected by the capital gains tax increase from 20 to 39.6 percent and a rise in the personal tax rate.
John Ricco, a policy analysis director at the Penn Wharton Budget Model, said that Biden’s proposal ‘does not have a lot of teeth,’ adding that those the tax is aimed at have multiple ways to evade it.
The Wharton expert pointed out that, unlike the income tax, the tax on capital gains is discretionary, meaning that people can opt to sell their investments in a way that would lower their tax rate.
In other words, the wealthiest can choose not to sell their stocks and other investments if they see that they would have to pay a high amount of tax for the transaction.
Furthermore, they may lower their taxable gains by paring gains when they have losses in other parts of their portfolio.
Finally, the richest can decide to slow down the pace at which they sell off their investments, effectively lowering the amount of tax they would have to pay.
The higher capital gains tax rate would apply only to individuals earning above U.S. $1 million per year.
Wharton researchers calculated that considering the possible tax evasions, the administration might collect around the U.S. $1 trillion.
This calculation suggests that nearly the U.S. $700 million of planned tax revenue might not arrive in the government’s cashbox.
The French experience
Several years ago, a similar tax policy turned out to be an utter failure in France.
In 2012, then-President Francois Hollande decided to implement the tax aimed at the wealthiest part of the population.*
The policy aimed at imposing a 75 percent tax on earnings of more than 1 million euros.
Yet, it ended up collecting much less than predicted by the government.
In 2013, only 16 billion euros were collected out of 30 million forecasted by the government.
Manuel Walls, a French prime minister at a time, conceded the failure by saying that too much tax kills tax.
In the end, the tax policy was even declared unconstitutional.