Debate on Capital Gains Tax

Members of the House and Senate held a rare joint meeting of the House Ways and Means Committee and the Senate Finance Committee to hear testimony from business and academic experts on the capital gains tax. The current tax rate for capital gains is 15%. If Congress lets the Bush-era tax rates expire at the end of 2012, capital gains will be taxed at 25%. By comparison, ordinary income is taxed up to 35%. Capital gains have long been taxed at a different rate than ordinary income in order to encourage investment. Lawmakers are considering whether the capital gains tax rate should stay at 15 % or move closer to the tax rate imposed on ordinary income.

The BNA Daily Tax Report, Witnesses Split on Whether Capital Gains Tax Rate Should Be Raised or Left Low, available through the Brooklyn Law School’s subscription to BloombergLaw (password required), said that “some witnesses said the rate should be left low to help jump-start investment and job creation and others said keeping the rate low would require significant trade-offs elsewhere.” Witness testimony is available at the Senate Finance Commitee website. Syracuse University Professor Leonard Burman told lawmakers that the tax system needs to be relatively neutral. “Low capital gains tax rates are the main reason why many wealthy individuals pay lower tax rates than middle-class families,” he said adding that taxing capital gains at a lower rate than income can do more harm than good. The reduced capital gains rate is the single biggest factor behind individual income tax shelters and there is a whole industry devoted to making the compensation of high-income people into capital gains, he said.

Few issues in tax policy are as divisive as capital gains tax. Should capital gains – the increase in value of assets such as stocks or businesses – be taxed at all? If so, when should they be taxed, when are they earned, or when are they realized? Should taxes be adjusted for inflation? And should gains be taxed at both the individual and corporate levels? The Brooklyn Law School Library copy of The Labyrinth of Capital Gains Tax Policy: A Guide for the Perplexed by Leonard E. Burman (Call # HJ4653.C3 B874 1999) tries to present the facts about capital gains. Explaining the complex rules that govern the taxation of capital gains, it looks at the kinds of assets that produce them, and factors that can lead to gains or losses. It also reviews the effects of capital gains taxation on saving and investment and considers the arguments for and against indexing capital gains taxes for inflation, as well as other options for altering the current system.

A September 2012 report by the Congressional Research Service, Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945, concludes: “The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.”