Biden reform to tax LTCG and qualified dividends as ordinary income for high-income filers

changelog_entry.yaml

@@ -0,0 +1,4 @@
+- bump: minor
+  changes:
+    added:
+    - Biden reform to tax LTCG and qualified dividends as ordinary income for high-income filers.

policyengine_us/parameters/gov/contrib/biden/budget_2025/capital_gains/income_threshold.yaml

@@ -0,0 +1,20 @@
+description: Presedent Biden proposed an increase of the capital gains tax rate for filers with taxable income above this threshold, based on filing status.
+metadata:
+  reference:
+    - title: General Explanations of the Administration's Fiscal Year 2025 Revenue Proposals
+      href: https://home.treasury.gov/system/files/131/General-Explanations-FY2025.pdf#page=88
+  label: President Biden capital gains tax rate increase threshold
+  unit: currency-USD
+  period: year
+  breakdown:
+    - filing_status
+JOINT:
+  2024-01-01: 0 # $1,000,000
+SINGLE:
+  2024-01-01: 0 # $1,000,000
+SEPARATE:
+  2024-01-01: 0 # $500,000
+HEAD_OF_HOUSEHOLD:
+  2024-01-01: 0 # $1,000,000
+WIDOW:
+  2024-01-01: 0 # $1,000,000

policyengine_us/reforms/biden/budget_2025/__init__.py

@@ -1,3 +1,7 @@
 from .medicare_and_investment_tax_increase import (
     create_medicare_and_investment_tax_increase_reform,
 )
+
+from .capital_gains_tax_increase import (
+    create_capital_gains_tax_increase_reform,
+)

policyengine_us/reforms/biden/budget_2025/capital_gains_tax_increase.py

@@ -0,0 +1,161 @@
+from policyengine_us.model_api import *
+
+
+def create_capital_gains_tax_increase() -> Reform:
+    class capital_gains_tax(Variable):
+        value_type = float
+        entity = TaxUnit
+        label = "Maximum income tax after capital gains tax"
+        unit = USD
+        definition_period = YEAR
+
+        def formula(tax_unit, period, parameters):
+            net_cg = tax_unit("net_capital_gain", period)
+            taxable_income = tax_unit("taxable_income", period)
+            adjusted_net_cg = min_(
+                tax_unit("adjusted_net_capital_gain", period),
+                taxable_income,
+            )  # ANCG is referred to in all cases as ANCG or taxable income if less.
+
+            cg = parameters(period).gov.irs.capital_gains
+
+            excluded_cg = tax_unit(
+                "capital_gains_excluded_from_taxable_income", period
+            )
+            non_cg_taxable_income = max_(0, taxable_income - excluded_cg)
+            income_less_ancg = max_(0, taxable_income - adjusted_net_cg)
+
+            filing_status = tax_unit("filing_status", period)
+
+            first_threshold = cg.brackets.thresholds["1"][filing_status]
+            second_threshold = cg.brackets.thresholds["2"][filing_status]
+
+            income_ordinarily_under_second_rate = clip(
+                taxable_income, 0, first_threshold
+            )
+
+            income_ordinarily_under_third_rate = clip(
+                taxable_income, 0, second_threshold
+            )
+
+            # Under the 2025 bidem reform, long_term cg and dividends are
+            # taxed at the income tax rates for filers with income over $1M
+            p_reform = parameters(
+                period
+            ).gov.contrib.biden.budget_2025.capital_gains
+            income_threshold = p_reform.income_threshold[filing_status]
+            excess_income = max_(0, taxable_income - income_threshold)
+
+            cg_in_top_bracket = min_(adjusted_net_cg, excess_income)
+
+            income_tax = parameters(period).gov.irs.income.bracket.rates["7"]
+
+            new_cg_tax = cg_in_top_bracket * income_tax
+
+            cg_in_first_bracket = max_(
+                0, income_ordinarily_under_second_rate - income_less_ancg
+            )
+
+            cg_in_first_bracket_below_top_bracket = max_(
+                cg_in_first_bracket - cg_in_top_bracket, 0
+            )
+
+            cg_in_second_bracket = min_(
+                max_(
+                    0, adjusted_net_cg - cg_in_first_bracket_below_top_bracket
+                ),
+                max_(
+                    0,
+                    income_ordinarily_under_third_rate
+                    - (
+                        non_cg_taxable_income
+                        + cg_in_first_bracket_below_top_bracket
+                    ),
+                ),
+            )
+
+            cg_in_second_bracket_below_top_bracket = max_(
+                cg_in_second_bracket - cg_in_top_bracket, 0
+            )
+
+            cg_in_third_bracket = max_(
+                adjusted_net_cg
+                - cg_in_first_bracket_below_top_bracket
+                - cg_in_second_bracket_below_top_bracket,
+                0,
+            )
+
+            cg_in_third_bracket_below_top_bracket = max_(
+                cg_in_third_bracket - cg_in_top_bracket, 0
+            )
+
+            main_cg_tax = (
+                cg_in_first_bracket_below_top_bracket * cg.brackets.rates["1"]
+                + cg_in_second_bracket_below_top_bracket
+                * cg.brackets.rates["2"]
+                + cg_in_third_bracket_below_top_bracket
+                * cg.brackets.rates["3"]
+                + new_cg_tax
+            )
+
+            unrecaptured_s_1250_gain = tax_unit(
+                "unrecaptured_section_1250_gain", period
+            )
+
+            qualified_dividends = add(
+                tax_unit, period, ["qualified_dividend_income"]
+            )
+
+            max_taxable_unrecaptured_gain = min_(
+                unrecaptured_s_1250_gain,
+                max_(0, net_cg - qualified_dividends),
+            )
+            unrecaptured_gain_deduction = max_(
+                non_cg_taxable_income + net_cg - taxable_income,
+                0,
+            )
+            taxable_unrecaptured_gain = max_(
+                max_taxable_unrecaptured_gain - unrecaptured_gain_deduction,
+                0,
+            )
+
+            unrecaptured_gain_tax = (
+                cg.unrecaptured_s_1250_rate * taxable_unrecaptured_gain
+            )
+
+            remaining_cg_tax = (
+                tax_unit("capital_gains_28_percent_rate_gain", period)
+                * cg.other_cg_rate
+            )
+            return main_cg_tax + unrecaptured_gain_tax + remaining_cg_tax
+
+    class reform(Reform):
+        def apply(self):
+            self.update_variable(capital_gains_tax)
+
+    return reform
+
+
+def create_capital_gains_tax_increase_reform(
+    parameters, period, bypass: bool = False
+):
+    if bypass:
+        return create_capital_gains_tax_increase()
+
+    p = parameters(period).gov.contrib.biden.budget_2025.capital_gains
+
+    if (
+        (p.income_threshold.JOINT > 0)
+        | (p.income_threshold.SEPARATE > 0)
+        | (p.income_threshold.WIDOW > 0)
+        | (p.income_threshold.SINGLE > 0)
+        | (p.income_threshold.SEPARATE > 0)
+    ):
+        return create_capital_gains_tax_increase()
+    else:
+        return None
+
+
+capital_gains_tax_increase = create_capital_gains_tax_increase_reform(
+    None, None, bypass=True
+)

policyengine_us/reforms/reforms.py

@@ -17,6 +17,7 @@
 from .biden.budget_2025 import (
     create_medicare_and_investment_tax_increase_reform,
 )
+from .biden.budget_2025 import create_capital_gains_tax_increase_reform
 from policyengine_core.reforms import Reform
 import warnings
 
@@ -50,6 +51,9 @@ def create_structural_reforms_from_parameters(parameters, period):
     reported_state_income_tax = create_reported_state_income_tax_reform(
         parameters, period
     )
+    capital_gains_tax_increase = create_capital_gains_tax_increase_reform(
+        parameters, period
+    )
 
     reforms = [
         afa_reform,
@@ -63,6 +67,7 @@ def create_structural_reforms_from_parameters(parameters, period):
         abolish_payroll_tax,
         reported_state_income_tax,
         medicare_and_investment_tax_increase,
+        capital_gains_tax_increase,
     ]
     reforms = tuple(filter(lambda x: x is not None, reforms))
 

policyengine_us/tests/policy/baseline/contrib/biden/budget_2025/capital_gains_tax_increase.yaml

@@ -0,0 +1,46 @@
+- name: Household with income over threshold and $100,000 over excess dividend and cg income 
+  period: 2024
+  reforms: policyengine_us.reforms.biden.budget_2025.capital_gains_tax_increase.capital_gains_tax_increase
+  input:
+    gov.contrib.biden.budget_2025.capital_gains.income_threshold.JOINT: 1_000_000
+    # Household.
+    people:
+      head:
+        age: 36
+        qualified_dividend_income: 0
+        long_term_capital_gains: 80_000
+      spouse:
+        age: 36
+        qualified_dividend_income: 120_000
+        long_term_capital_gains: 0
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+        taxable_income: 1_100_000
+        filing_status: JOINT
+  output:
+    # First 100,000 taxed at 20%
+    # Last 100,000 taxed at 37%
+    capital_gains_tax: 57_000 # 15,000 + 37,000
+
+- name: Reform not applied
+  period: 2024
+  input:
+    # Household.
+    people:
+      head:
+        age: 36
+        qualified_dividend_income: 0
+        long_term_capital_gains: 80_000
+      spouse:
+        age: 36
+        qualified_dividend_income: 120_000
+        long_term_capital_gains: 0
+    tax_units:
+      tax_unit:
+        members: [head, spouse]
+        taxable_income: 1_100_000
+        filing_status: JOINT
+  output:
+    # 200,000 taxed at 20%
+    capital_gains_tax: 40_000

test.ipynb

@@ -26,10 +26,14 @@
     }
    ],
    "source": [
-    "from policyengine_us.data import CPS_2022, EnhancedCPS_2022, CalibratedPUFExtendedCPS_2022\n",
+    "from policyengine_us.data import (\n",
+    "    CPS_2022,\n",
+    "    EnhancedCPS_2022,\n",
+    "    CalibratedPUFExtendedCPS_2022,\n",
+    ")\n",
     "\n",
     "CalibratedPUFExtendedCPS_2022().generate()\n",
-    "EnhancedCPS_2022().generate()\n"
+    "EnhancedCPS_2022().generate()"
    ]
   },
   {