US tax plan ‘opens door to rest of world’ to increase capital levies

President Joe Biden’s plans to nearly double the capital gains tax rate for top earners in the United States have sent shockwaves in America – and raised concern around the world.

Tax experts in the United States and Europe predict that other governments could seek to copy the proposals announced by Biden last week and increase taxes on the capital of the richest to consolidate their own public finances in the wake of the pandemic.

For Americans who earn more than $ 1 million a year, Biden wants to raise the top CGT rate from 20% to 39.6%. This percentage would rise to 43.4 per cent if it were coupled with an existing surtax on investment income.

“Doubling over CGT is totally seismic,” said Daniel Hyde, partner at UK accounting firm Blick Rothenberg. “It opens the door for everyone across the world, as it’s the first major developed country to go hard on CGT.

“The CGT is a hot potato in the UK, but the government has not shown its hand in the budget. This potentially sets a precedent to follow. “

Rachael Griffin, tax and financial planning expert at Quilter, the wealth manager, expects UK CGT rates to be raised to the same rates as income tax when the fall filing returns.

This would eliminate a haircut and revert to the position prior to 2008, when CGT was charged at the income tax rate. “Bad news comes in the fall,” Griffin said.

Kate Barton, EY’s global vice president of taxation, added that the Biden plan contained two key trends that were also developing in other industrialized countries, particularly in Europe.

First, governments are seeking to balance stimulus support programs with increased revenue geared towards tax increases on the so-called “ultra-rich.”

Second, there is growing interest in redistributing wealth through taxation to improve social inequalities that worsened during the pandemic.

“During the pandemic, the rich got richer and the poor got poorer,” Barton said. “The question Biden asks himself is, ‘How do we redistribute wealth to the poorest? [and he’s decided] attack the 1 percent of the population, tax them more and through government spend more. It is not unique to the United States. ”

Most countries have a difference between the rate at which income tax is charged and the CGT rate, according to David Linke, global head of tax and legal services at KPMG. He said the US administration’s approach could “invite debate on whether gains on capital assets and labor income should be treated the same in the future.”

Tax activists calling for greater social equality welcome this change. “Taxing wealth and labor income at the same rate makes economic and political sense,” said Robert Palmer, executive director of Tax Justice UK, a campaign group. “It is perverse that a hedge fund manager can pay a lower tax rate than his cleaner.”

However, it is by no means certain that countries outside of the United States would follow Washington’s footsteps. Some professionals believe other countries could respond to planned US CGT hikes by making their own tax regimes more attractive to wealthy Americans, perhaps by using special regimes for foreigners classified as non-domiciled. [non-dom] for tax purposes.

The Tax Foundation, a U.S. think tank, reports that increasing the top CGT rate to 43.4% would mean those earning more than $ 1 million a year would face total tax rates of more than 50% on capital gains, when state taxes are included. .

Hyde said: “Senior executives in the fund management industry, particularly in New York City, may find these rates untenable and may view London as an attractive alternative, particularly in light of the [UK’s] non-dom diet. Of course, a move to London does not remove the [US] federal tax, but 43.4% may still look a lot more attractive than nearly 55% and even the threat of a UK tax hike could still place London as a possible destination. “

The United States is unusual because its authorities can impose federal taxes on its citizens no matter where they live. Tax experts say they expect to see more demands from wealthy American expats to renounce their citizenship if the CGT’s proposals pass. Hyde reports that he has already had a few questions.

But giving up US citizenship is “not a step to be taken lightly,” said Mike Hayes, tax partner at Moore Kingston Smith, an accounting firm. Those who do and have global assets worth more than $ 2 million must pay an exit tax or “expatriation fee”.

“You are taxed as if you sold all of these assets at market value and you pay US tax on the gains,” Hayes explained. “This can make expatriation very expensive and those with very large earnings will be hit the hardest.”

Instead, tax experts predict that richer Americans are more likely to crystallize their earnings before the new regime is introduced to pay under the old system, or to hold onto their assets longer when higher taxes are introduced. .

It remains to be seen whether the measures, whether adopted in the United States or elsewhere, will significantly increase tax levies, according to Marvin Rust, tax officer at the London office of the US professional services firm Alvarez & Marsal. He said: “It’s a complicated puzzle with a lot of pieces and the difficulty is in predicting the behavior of people.”

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