![]() ![]() Estimating agencies believe this lock-out effect is so strong that taxing capital gains as ordinary income would actually lose revenue relative to current law. ![]() Finally, most observers find that a high level of capital gains tax creates a lock-in effect, where investors who would sell assets keep them instead to avoid taxation. In addition, they point out that capital gains levies tax not only on real gains but also increases in asset price due only to inflation. ![]() Proponents also worry that taxing capital gains as ordinary income would effectively lead to “ double taxation” since profits are already taxed at the corporate level. Many proponents argue that ideally the United States would shift to a consumption tax with no tax on capital gains, and a preferential rate represents a step in that direction. Proponents of lower rates on capital gains argue they provide an important incentive for investment, which ultimately is the key to long-term growth. What are the Arguments For and Against Lower Rates on Capital Gains? In 2011, half of all capital gains were earned by 0.1 percent of taxpayers.Īs the Tax Policy Center estimates, taxpayers making under $75,000 see very little (< 0.05 percent) change in their after-tax income, where taxpayers making over $1,000,000 see a 4.7 percent boost in their after-tax income due to these preferential rates. The driver of this regressivity has to do almost entirely with the fact that wealthier Americans own the vast majority of assets in this country. According to the Tax Policy Center, nearly 95 percent of the benefit of the preferential rate goes to those making over $200,000 per year and more than three-quarters of the benefit goes to those making over $1 million per year. Because realizing capital gains is completely voluntary, many investors will reduce their realization as the rate goes up, mitigating or possibly even reversing the potential revenue gain.Įven though those in bottom brackets receive a large advantage with a zero percent rate, nearly all of the benefit of the reduced rates on capital gains flows to the top of the income spectrum. Tax expenditure estimates do not account for a taxpayer’s behavior. Importantly, the value of the capital gains tax preference is significantly higher than the potential revenue raised from eliminating it. Other smaller capital gains preferences, such as exclusions for coal royalties, timber, and agriculture cost about $1 billion per year, combined. ![]() We will discuss related preferences for dividends and “step up basis” of capital gains at death in a different post.Īlthough CBO does not separate the cost of the preferential rate on capital gains from dividends, by our estimates the capital gains preference costs an average of $120 billion per year from 2013-2017 and will cost about $1 trillion from 2014-2023. Certain types of salaries are technically paid out from the sale of stocks and bonds (“carried interest”) can also be counted as capital gains.īelow, we answer other questions about the preferential tax rates on capital gains. Royalties by coal companies and sale of livestock, for example, are both counted as long-term capital gains. The preferential rate is also extended to some income not universally thought to be capital gains. For example, corporate capital gains are taxed as ordinary income and pay the corporate rate of 35 percent small business stock and collectibles are taxed at 28 percent, a portion of depreciated real estimate investment is taxed at 25 percent, and a certain amount of the purchase of small business stock can be excluded, further lowering the effective rate. This tax is not paid on the entirety of revenue from an asset sale, but rather the difference in value between when the asset was bought and when it was sold.Īlthough most long-term capital gains are taxed under the 0%, 15%, 20% rate schedule, some capital gains are taxed differently. Taxpayers with over $200,000 of income (or $250,000 for married couples) will also pay an additional 3.8 percent tax on unearned income starting this year as a result of the Affordable Care Act, bringing the effective top rate up to 23.8 percent. Taxpayers in the bottom two brackets pay a zero percent rate on these gains, those in the middle brackets pay 15 percent, and those in the top bracket pay 20 percent. If an item is held for over a year, it is taxed at long-term capital gain rates. If the item is held for less than a year, the gain is taxed at ordinary rates (up to 39.6 percent). Though assets frequently increase in value, taxes on them are deferred until the item is sold and the profits are realized. A capital gain is profit from the sale of an asset, like a business, stock, piece of art, or parcel of land. ![]()
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