Bloomberg has reported that the Biden administration will propose raising the federal capital gains tax rate to 39.6%, as well as the top marginal income tax rate, as proposed by President Biden. In addition to the 3.8% tax on net investment income that Congress established in 2009, the combined rate would be 43.4%. The president was expected to propose this as part of his “American Families Plan.” In that sense, the announcement would not come as a surprise, although for some, the magnitude of the proposed tax increases is surprising.

This proposal would apply to taxpayers with annual income exceeding US$1 million, and would likely also apply to qualified dividends, which are currently taxed at the same rate as capital gains. The Biden campaign also proposed eliminating the step-up in the basis of inherited assets, which would result in much higher taxable gains on those assets once they are sold.

Of course, the proposal must be negotiated in Congress, so the final version may end up being a more limited version of the proposed increase; furthermore, there are questions about when it would take effect.

Goldman Sachs offers some insights, predicting that “Congress will enact a more modest increase, potentially around 28%.” While it is possible that Congress will pass the proposal in its entirety, they believe a moderated version is more likely given the Democrats’ slim majorities in the House and Senate. At 43.4%, long-term capital gains would be taxed at the highest rate in the more than 100 years since Congress established the income tax. In their view, a 28% rate seems more likely, as it falls roughly halfway between the current rate and Biden’s likely proposal.

And although it is unclear when the tax rate increase would take effect, the bank’s economists “believe it is unlikely to apply to earnings earned before May, and an increase starting January 1, 2022, is more likely.”