President Biden’s budget proposal for fiscal year 2024 includes a wide array of policy changes, new programs, increased spending, and higher revenue. The budget is trying to straddle two conflicting goals: increasing spending—which accelerates the unsustainability of the federal budget—while limiting tax increases to a narrow segment of high‐​income Americans.

The budget proposes $4.7 trillion in tax increases on businesses and individuals, raising U.S. tax rates to some of the highest in the developed world. The budget’s projected revenues rise to 20.1 percent of GDP by 2033, 2.7 percentage points above the 50‐​year average. All that tax revenue is still not enough to stabilize government debt as a share of the economy.

The administration plans to release additional details on each of the proposed tax increases next week. Based on summary documents, current reporting, and past proposals, we have a good sense of how the White House would like to increase taxes.

The FY 2023 budget was ominously silent on what happens at the end of 2025 when the 2017 Tax Cuts and Jobs Act expires and taxes automatically increase for most Americans. This hidden tax increase of another $1 trillion to $2 trillion (depending on the assumptions) is baked into the president’s budget baseline. The current budget acknowledges but does not explicitly extend the tax cuts or protect middle‐​class Americans from the pending tax increases.

The budget’s new taxes and tax increases fall into three broad buckets: higher taxes on wage income, higher taxes on investment income, and higher business taxes.

The President’s pledge to only raise taxes on people earning more than $400,000 a year means that most of the explicitly spelled‐​out tax increases are targeted at high‐​income Americans. The U.S. federal tax system is already very progressive, with the highest‐​income Americans paying the highest average tax rates. The proposed tax increases will likely give the United States some of the highest income and business tax rates in the Organisation for Economic Co‐​operation and Development (OECD).

Higher tax rates on the wages of a narrow segment of the United States’ most productive executives and business leaders will have strong disincentives against their continued work and other negative behavioral effects that translate into a less dynamic, slower‐​growing economy.

Higher taxes on investment income target the financial rewards to successful entrepreneurs who undertake risks and persevere through failure to build high‐​return businesses that provide welfare‐​enhancing goods and services to people around the world. Close to doubling the capital gains tax rate and layering on other levies, such as a stock buyback tax and unrealized capital gains tax, put the tax on capital gains well above its revenue‐​maximizing rate and would add a stifling weight to American innovation.

Higher taxes on businesses also stifle investment and growth. The budget includes raising the corporate income tax rate by 7 points, to 28 percent, and expanding the Net Investment Income Tax (NIIT) to pass‐​through business income. Economic research shows that workers—as opposed to investors or consumers—typically pay between 75 percent and 100 percent of the cost of corporate tax increases through lower wages. Lower wages are the result of less investment and slower productivity growth.

The following list includes some of the president’s major tax proposals that help make up a majority of the $4.7 trillion in higher revenues.

Increase top marginal tax rate to 39.6 percent. The current top marginal income tax rate of 37 percent applies to income earned above $578,125 for single filers ($693,750 married). The budget proposes returning the top rate to 39.6 percent, where it was in 2017 before the tax cut, and the threshold for the top tax bracket is reduced to $400,000 for single filers ($450,000 married). After accounting for state and local income taxes, Americans in many places, including California, Hawaii, New Jersey, and New York City, will face top rates above 50 percent.

Increase corporate income tax rate to 28 percent. The 2017 tax cuts lowered the corporate income tax rate from 35 percent—the highest rate in the developed world—to 21 percent. After accounting for state corporate income taxes, the United States’ current average corporate tax rate remains higher than the worldwide average. Biden proposes raising the corporate income tax to 28 percent, restoring America’s title of highest corporate tax rate in the developed world. In addition to a higher headline rate, the budget makes major changes to international taxation, adopts an OECD minimum tax proposal, and makes other changes designed to increase taxes on American businesses.

Tax capital gains and dividends at top rate. Long‐​term capital gains and dividends are taxed at a top rate of 20 percent, plus the 3.8 percent NIIT. The lower tax rate on investment income (lower than income taxes on wages) reflects that the investment’s principal has already been subject to wage taxes when it was earned, and the business profits were also already taxed by the corporate income tax. The budget proposes taxing capital gains at the new top marginal income tax rate of 39.6 percent (plus the 5 percent NIIT) for taxpayers whose income exceeds $1 million.

Expand Net Investment Income Tax (NIIT) at 5 percent rate. Obamacare’s NIIT of 3.8 percent applies to most non‐​wage passive income (primarily capital gains and other investment income) for taxpayers with income above $200,000 single ($250,000 married). The NIIT was intentionally designed to exempt active business income to spare small and family‐​owned businesses from higher taxes. For income over $400,000, the budget proposes expanding the NIIT to include more types of income and raises the rate to 5 percent. Combined with taxing capital gains at top income tax rates, the 5 percent NIIT raises the top federal marginal capital gains tax rate to 44.6 percent.

Quadruple stock buyback tax. The Inflation Reduction Act of 2022 implemented a new 1 percent excise tax on the total value of stock repurchases or “stock buybacks.” A stock buyback is when a business repurchases shares to return unused profits to investors and is similar to an optional one‐​time dividend payment. The budget proposes quadrupling the new tax on buybacks to 4 percent, which will lower investors’ after‐​tax return on the affected investments, and likely induce firms to rely more heavily on dividend payments.

End step‐​up in basis at death. Under current law, capital gains are taxed when the gain is realized—when the investment is sold and there is an actual profit to tax. If unrealized capital gains are inherited at death, no tax is due, and the value of the original investment from which taxable gains are measured (the “basis”) is increased or “stepped up” to the current value. Any future gains are taxable to the new owner when realized. Step‐​up in basis protects inheritances, which are often active investments in businesses, from having to be liquidated to pay the tax. The budget proposes eliminating step‐​up in basis, making death a taxable event. If the proposal follows the 2023 budget, the change applies to unrealized capital gains over $5 million for single filers ($10 million married).

Creates “billionaire” minimum tax. The budget proposes a new minimum tax of 25 percent on income and unrealized capital gains for “the wealthiest 0.01 percent.” In the 2023 budget, that meant the minimum tax applied to taxpayers with more than $100 million in total wealth. This new minimum tax would be a third, parallel income tax system, adding to the existing alternative minimum tax. The new minimum tax applies to two entirely new tax bases—wealth and unrealized capital gains. Defining and taxing wealth and unrealized capital gains pose numerous practical challenges.

Tax carried interest as ordinary income. Many investment managers are compensated with both a traditional wage and incentive‐​based pay based on the profits from their investments. The portion of the investment earnings shared with the manager is known as “carried interest” and is taxed at lower capital gains tax rates. The budget would recharacterize this investment income, treating it as ordinary wage income.