Instead of taxing long term gains at a flat rate of 15% or whatever, should these be taxed at a progressive rate? Should they be counted as ordinary income? Can the chilling effect on investment be quantified?
Thanks,
Rob
How long do you consider long-term to be?
Currently, I believe it is 24 months.
Absolutely. Would you like to see it quantified favorably or unfavorably? 
I want to reduce income inequality but not curb economic growth. Is that possible? Is this the means to do it? Is it a useful piece of the puzzle?
FWIW, I don’t think soaking the rich for it’s own sake is appropriate, fair or moral. If I did, I would say we should nationalize all their wealth and crucify them in the bargain. I don’t believe that the rich got that way by stealing from everyone else (for the most part), but through a combination of luck, hard work and being born not too far from where they are now and that automation and globalization are the biggest driving factors of income inequality and resisting them just prices you out of the market. That said, I don’t think the wealth gap is in our national interest and will end badly.
Failing reducing income inequality, I would at least like to put income growth for the rest on an upward trajectory in real terms. While I don’t believe in enforcing equality of outcomes, I also don’t believe that we are really providing equal opportunity for our poorer citizens.
In the United States, long-term requires a holding period of only 12 months. They are currently taxed progressively, at 0%, 15%, 15+3.9% and 20+3.9%, depending on your income level. There are also high maximum rates for specific capital assets: 25% (sec 1250) and 28% (collectibles). The +3.9% is the Net Investment Income Tax, which is technically separate from capital gains, but capital gains are investment income, so it’s best to think of the combined rate.
I think it makes sense to tax capital gains progressively, especially if you’re also taxing other investment income like interest progressively. Sometimes people argue that capital gains taxes spur investment that produce jobs or other benefits, but I have yet to see numbers that prove any relationship, and I don’t see why gains are favored and interest is not. (After all, savings accounts and bonds both provide capital to be used for investment.)
I kind of lean toward eliminating the long-term treatment of capital gains, but I think it might be reasonable to cap the rates on some investments. For example, Sec 1250 (real estate depreciation recapture) already has the 25% maximum and Sec 1244 (stock from small business creation) could be modified to cap the gains rate, rather than just addressing losses as it does now.
Given that we managed to eke out reasonable growth in the '90s when the rich had a smaller share of the pot than today, we could manage. And I’m sure there will be some impact of a say 5% increase for the second million dollars of gain, but it is likely to be outweighed by the beneficial effects of less inequality and a smaller deficit. So it sounds like a good idea to me - nothing too extreme, but some increase.
I think there should be a class of medium-term capital gains, things less than say 20 years but more than 1. Raise taxes somewhat on these gains but keep them at least slightly lower than ordinary income. Then drastically reduce the rate on what becomes truly long-term gains. Hell, I’d even suggest throwing in a 5-20 category that would be taxed at current rates. The idea is to encourage people to make long-term investments, not ones that they’re going to get out of relatively quickly in the grand scheme of things. That’s the idea behind taxing short-term capital gains as ordinary income I assume; let’s just have things be more progressive (or regressive?) in terms of holding period.
And yes, the taxes themselves should be progressive, but they already are basically.
12 months right now.
Yes. All income of all sources and descriptions should be taxed on the same progressively rated basis. The tax code is not an appropriate place for government social engineering.
Progressive tax rates ARE government social engineering.
Some capital gains should be taxed progressively. I liked half of Romney’s plan on capital gains. Romney’s full plan on capital gains taxes were:
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Eliminate them for people earning less than $200,000 a year (so Long Term Capital gains would be tax free)
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Tax them at 15% (the current rate) for people earning over $200,000 a year, and eliminate the 3.9% additional tax on high earners capital gains income (his comments predated the kick-in of the 2012 law that increased the base rate to 20% for high earners.)
My thought would be to implement #1 of the Romney plan. The reason being, i don’t like discouraging savings by middle income and lower income Americans, rather I’d like to encourage it. The vast majority of people earning $200,000 or less per year, make only a very small portion of their income from capital gains or dividend income. Instead, their paltry brokerage accounts are usually earning maybe a couple grand a year at best, and it also generates a lot of annoying paperwork and taxes all for a few hundred dollars in capital gains tax. In terms of total tax revenue, not a lot of capital gains tax revenue comes from the AGI < $200,000 crowd. Remember that most of the very wealthy earn almost all their income from capital gains, and this is where the vast majority of capital gains taxes come from.
As for #2, I wouldn’t implement that aspect of it at all. Instead, for persons who earn over $200,000 a year, I’d tax them at 15%, and then at some higher rung I’d eliminate the alternative tax rate for capital gains entirely and tax them at regular income rates. This would be a dramatic increase in revenue, and would at the same time be a very small tax cut for middle income Americans but most importantly it’d give them fewer reasons not to save.
So are regressive tax rates. So are any deductions. Yeah, that horse left the barn a long time ago.
Nope. Not when they are applied equally to all people and all income.
I agree about deductions. Those should be abolished as well.
If the legislature wants to accomplish a specific end, let them vote on the record to spend public funds on it, rather than back-door subsidizing with tax breaks.
Where does all the no-deductions thinking come from? Is it part of the Flat==Fair blogs?
Peremensoe, Mr. A and Mr. B both earn $300,000. A spends his money on hookers and blow; B on the medical surgery he needs. Should they pay the same tax?
If the OP’s intent is to redistribute money, that’s where (some of) the money is.
The effects include making more investments unprofitable, and changing the risk allocation for investors who are sensitive to that. I do not trust myself to quantify it. And even if I did, weighing the negatives against the value of redistribution is going to be subjective. It might be easier to weigh the scheme against other revenue sources.
The Obama administration proposed raising the capital gains tax rate for households making 250K or more 33%. It was estimated by the OMB that this rate hike would generate an average of 10.5 billion dollars per year over the first decade. If you distributed that money to the lower half of the income bracket each person would get an extra $67 per year. Not enough to make much of a difference in income inequality.
I think it’s a combination of 1) favoring fair tax, 2) misunderstanding the difference between deduction and loophole, 3) wanting to limit the influence Congress has to subsidize/penalize market activity, and 4) just overall desire to simplify the tax code.
But to look at your example: Mr B gets no deduction for the first 30,000 of his medical expenses. Then he needs to be over the standard deduction (about 12,000 for a married couple). Under the current rules that mandate insurance coverage, he’ll hit his annual out of pocket maximum before he gets a single penny of deduction. So apparently, the current consensus is that he should pay the same in tax.
In the meantime, we wasted five lines of Sch A and thirty pages of Pub 17 for a deduction that is so limited it’s practically useless.
I’m in favor of progressive tax rates on capital gains but I think that the basis for the gains should be indexed to the CPI so only true gains get taxed.