Tax Policy Center: Capital Gains Taxes

Taxing Adjusted Gross Income Instead of Taxable Income

info@taxpolicycenter.org ( Jacob Goldin, Eric Toder) — Tue, 25 Aug 2009 00:00:00 EST

The House leadership has proposed to finance health care reform with a surtax on adjusted gross income (AGI) of high-income individuals, while the president's budget would increase the two top marginal tax rates on taxable income. Income taxed at statutory marginal rates is 58 percent of AGI for all taxpayers but only 46 percent of AGI for taxpayers with income over $1 million. While personal exemptions and deductions account for most of the difference between the two tax bases for the population as a whole, capital gains and qualified dividends make up most of the difference for very high income taxpayers.

Taxing Capital Gains in Australia: Assessment and Recommendations

info@taxpolicycenter.org ( Leonard E. Burman) — Wed, 25 Mar 2009 00:00:00 EST

One of the most vexing and contentious issues in taxation is the proper treatment of capital gains-the increase in value of an asset such as shares of company stock or a business. In principle, under an income tax, capital gains should be included in the tax base as they accrue. In practice, if they are taxed at all, capital gains are almost always taxed only when an asset is sold (or "realized") and generally at lower rates than other income.

Who Pays Capital Gains Tax?

info@taxpolicycenter.org ( Eric Toder) — Thu, 31 Jul 2008 00:00:00 EST

Fewer than one in seven individual income taxpayers reported taxable capital gains in 2006. Over half of taxpayers with gains had incomes below $75,000, but most capital gains were reported by very high income taxpayers. The 3 percent of returns with AGI over $200,000 reported 31 percent of AGI and 83 percent of capital gains; the 0.3 percent with AGI over $1,000,000 reported 15 percent of AGI and 61 percent of capital gains. Many more Americans accrue capital gains on corporate shares they hold within tax-deferred employer-sponsored retirement plans, but they do not pay capital gains tax on these gains.

A Preliminary Analysis of the 2008 Presidential Candidates' Tax Plans (Summary)

info@taxpolicycenter.org ( The Tax Policy Center) — Tue, 24 Jun 2008 00:00:00 EST

Tax and fiscal policy will loom large in the next president's domestic policy agenda. Nearly all of the tax cuts enacted since 2001 expire at the end of 2010 and the individual alternative minimum tax (AMT) threatens to ensnare tens of millions of Americans. While a permanent fix palatable to both political parties has proven elusive, both candidates have proposed major tax changes. This summary outlines our analysis of the 2008 presidential candidates' tax plans. The full length report is also available.

A Preliminary Analysis of the 2008 Presidential Candidates' Tax Plans (Full Report)

info@taxpolicycenter.org ( The Tax Policy Center) — Fri, 20 Jun 2008 00:00:00 EST

Tax and fiscal policy will loom large in the next president's domestic policy agenda. Nearly all of the tax cuts enacted since 2001 expire at the end of 2010 and the individual alternative minimum tax (AMT) threatens to ensnare tens of millions of Americans. While a permanent fix palatable to both political parties has proven elusive, both candidates have proposed major tax changes. This report describes how we performed our modeling and analysis, outlines the major tax proposals, and discusses the implications of their policies for the revenue raised, taxpayer economic activity, and the distribution of the tax burden.

Tax Rates on Capital Gains and Dividends Under the AMT

info@taxpolicycenter.org ( Benjamin H. Harris, Christopher Geissler) — Mon, 03 Mar 2008 00:00:00 EST

Recent tax acts sharply lowered tax rates on long-term capital gains and dividend income. For millions of taxpayers, however, the alternative minimum tax limits the benefits from these cuts by increasing the effective marginal tax rates on capital gains and dividend income. The culprit is the phaseout of the AMT exemption.

Tax Reform, Tax Arbitrage, and the Taxation of "Carried Interest" : Testimony before the U.S. House of Representatives Committee on Ways and Means

info@taxpolicycenter.org ( C. Eugene Steuerle) — Thu, 06 Sep 2007 00:00:00 EST

C. Eugene Steuerle gave testimony on the taxation of carried interest before the U.S. House Committee on Ways and Means. He notes among his findings that as a matter of both efficiency and equity, capital gains relief is best targeted where tax rates are high, as in the case of the double taxation of corporate income. The case for providing capital gains relief for carried interest is relatively weak, resting primarily upon whether the administrative benefits of the simple partnership structure needs to be maintained in this arena; it does not rest upon arguments for favoring capital income, entrepreneurs, or risk.

End the Break On Capital Gains

info@taxpolicycenter.org ( Leonard E. Burman) — Mon, 30 Jul 2007 00:00:00 EST

In this Washington Post commentary, senior fellow Len Burman explains why the capital gains tax break does more harm than good and why Congress should close the loophole once and for all.

Urban Institute Book Considers Taxation of Capital Income, Illuminates Policy Issues

info@taxpolicycenter.org ( The Urban Institute) — Mon, 25 Jun 2007 00:00:00 EST

A new Urban Institute Press book delves into the intricacies of how the U.S. tax system deals with capital income and what switching to a consumption tax might mean. In Taxing Capital Income, some of the nations leading tax experts tackle three questions integral to capital income: Do we tax it? Should we tax it? Can we tax it?

The 15 Percent Rate on Capital Gains: A Casualty of the Alternative Minimum Tax

info@taxpolicycenter.org ( Greg Leiserson) — Wed, 07 Mar 2007 00:00:00 EST

Tax rate reductions on long-term capital gains and qualifying dividends were a key, highly touted component of the tax cuts passed in the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). However, like the 20012006 tax cuts more broadly, taxpayers affected by the individual alternative minimum tax (AMT) may not pay the advertised lower rates. This article explains the interaction between the capital gains rate and the AMT and provides example tax calculations for two sample taxpayers.

Under the Sheltering Lie

info@taxpolicycenter.org ( Leonard E. Burman) — Tue, 20 Dec 2005 00:00:00 EST

[Marketplace] The White House says lowering taxes on capital gains and dividends will create jobs and opportunity. Tax analyst and commentator Len Burman thinks not.

Capital Gains Tax Rates, Stock Markets, and Growth

info@taxpolicycenter.org ( Troy Kravitz, Leonard E. Burman) — Mon, 07 Nov 2005 00:00:00 EST

Claims that increasing capital gains tax rates will adversely impact stock markets and economic growth are not strongly supported by empirical data. Over the last half-century, the correlation between the maximum capital gains tax rate and the ratio of the S&P index to GDP has been about -0.35. Also, capital gains rates display little evidence of correlation with economic growth.

Volatility of Capital Gains Realizations

info@taxpolicycenter.org ( Eric Toder, Troy Kravitz) — Mon, 29 Aug 2005 00:00:00 EST

Higher capital gains realizations are one likely source of the higher individual income tax revenues contributing to this year's decline in the Federal deficit. But capital gains realizations are highly variable over time, even in years when capital gains rates area stable. Between 1959 and 2003, the standard deviation of the ratio of capital gains realizations to gross domestic product (GDP) was about 40 percent of its mean value. In recent years, changes in the ratio of capital gains realizations to GDP have tracked changes in the ratio of the stock prices to GDP, which is about equally variable.

Improved Information Reporting for Capital Gains

info@taxpolicycenter.org ( C. Eugene Steuerle) — Mon, 08 Aug 2005 00:00:00 EST

Eugene Steuerle suggests one ripe area for expanded reporting involving capital gains, particularly from mutual funds and brokerage houses. The IRS could match net gains from information reports with what taxpayers report on their returns, taxpayers would not be faced with multiple choices, they would not have to pay extra fees to their tax preparers to track down additional data, and financial intermediaries would get fewer requests for information from taxpayers at the end of the year.

Extension of Saving and Investment Incentives : Statement before the Subcommittee on Taxation and IRS Oversight of the Committee on Finance, United States Senate

info@taxpolicycenter.org ( Eric Toder) — Thu, 30 Jun 2005 00:00:00 EST

Congress is considering extending certain tax benefits for saving and investment that are slated to expire over the next several years, including the special rates on capital gains and dividends, the saver's credit, and the deduction for college tuition. This testimony addresses these provisions' effects on income distribution and saving and highlights the differences between the current special rates for dividends and capital gains and "corporate integration" proposals to end double taxation of corporate equity income and tax all capital income once.

The Expanding Reach of the Individual Alternative Minimum Tax

info@taxpolicycenter.org ( Leonard E. Burman, William G. Gale, Jeff Rohaly) — Tue, 31 May 2005 00:00:00 EST

The Expanding Reach of the Individual Alternative Minimum Tax focuses on both the original minimum tax and its successor, the individual alternative minimum tax (AMT). The minimum tax and the AMT have applied in the past to a small minority of high-income households. But barring a change in law, this "class tax" will soon be a "mass tax". By 2010, repealing the AMT will cost more than repealing the regular income tax. This report updates an article originally published in the Journal of Economic Perspectives to reflect tax laws passes in 2003 and 2004 and the latest economic projections.

The Expanding Reach of the Individual Alternative Minimum Tax : Testimony submitted to the United States Senate Subcommittee on Taxation and IRS Oversight of the Committee on Finance

info@taxpolicycenter.org ( Leonard E. Burman) — Mon, 23 May 2005 00:00:00 EST

Leonard Burman's testimony, submitted to the U.S. Senate Finance Subcommittee on Taxation and IRS Oversight, focuses on both the original minimum tax and its successor, the individual alternative minimum tax (AMT). Both the minimum tax and the AMT have applied in the past to a small minority of high-income households. But barring a change in law, this "class tax" will soon be a "mass tax." By the end of the decade, repealing the AMT will cost more than repealing the regular income tax. The testimony updates an article originally published in the Journal of Economic Perspectives to reflect tax laws passed in 2003 and 2004 and the latest economic projections.

Options for Reforming the Estate Tax

info@taxpolicycenter.org ( William G. Gale, Leonard E. Burman, Jeff Rohaly) — Mon, 18 Apr 2005 00:00:00 EST

Retargeting the estate tax to very wealthy households and lowering its rates would blunt much of the criticism against it while retaining many of its advantages. This brief explains how the estate tax works and examines who is affected by it under current law. It discusses how reform would affect tax revenues, the distribution of tax burdens, farms and small businesses, and charitable giving and bequests. A concluding section discusses ways to reduce the tax's complexity.

Options to Reform the Estate Tax

info@taxpolicycenter.org ( Leonard E. Burman, William G. Gale, Jeff Rohaly) — Wed, 23 Mar 2005 00:00:00 EST

The Individual Alternative Minimum Tax : A Data Update

Tue, 31 Aug 2004 00:00:00 EST

The individual alternative minimum tax (AMT) was intended to guarantee that high income people paid at least some tax, but it is poorly designed. Absent a change in law, close to 30 million taxpayers will become subject to the AMT by 2010. This data update presents new data for the tables in our July 2003 Tax Notes article and expands on the reform options presented in the Spring 2003 Journal of Economic Perspectives article. We also briefly explain the tables.

Small Business and Flow-Through Entities

info@taxpolicycenter.org ( Peter Orszag) — Mon, 12 Apr 2004 00:00:00 EST

The composition of income reported on tax returns changes markedly as income increases. On most tax returns, wages and salaries are the dominant source of income. Capital gains become more significant at higher incomes, but even at adjusted gross income (AGI) of $200,000 to $500,000, they only averaged about 12 percent of income in 2000.

Preferential Capital Gains Tax Rates

info@taxpolicycenter.org ( Deborah Kobes, Leonard E. Burman) — Mon, 19 Jan 2004 00:00:00 EST

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) cut the top tax rate on long-term capital gains from 20 percent to 15 percent, the lowest level since World War II. JGTRRA also cut the rate on dividends to 15 percent; previously dividends had been taxed as ordinary income. In contrast, capital gains have been taxed at lower rates than ordinary income for most of the history of the income tax. And reductions in capital gains tax rates have usually corresponded with reductions in tax rates on ordinary income.

Composition of Income Reported on Tax Returns

info@taxpolicycenter.org ( Leonard E. Burman, Deborah Kobes) — Mon, 10 Nov 2003 00:00:00 EST

Taxing Capital Gains in New Zealand

info@taxpolicycenter.org ( Leonard E. Burman, David White) — Mon, 01 Sep 2003 00:00:00 EST

This article analyzes the economic impact of taxing capital gains and four options for taxing capital gains in New Zealand. Drawing on their United States and New Zealand tax policymaking experience and the latest international research, the authors argue that the Tax Review 2001 dismissed too readily taxing gains on a realization basis. While acknowledging its glaring deficiencies, they contend that such problems as lock-in and loss limitations appear to be fairly modest based on available empirical evidence. The key point is that there is no perfect way to tax capital gains in a real-world income tax. And, on balance, taxing gains on a realization basis has a number of advantages over accrual taxation, the risk-free return method proposed by the Tax Review 2001, and taxing capital gains in an ad hoc and inconsistent fashion as New Zealand currently does.

The Impact of Pension Funding on State Government Finances

info@taxpolicycenter.org ( J. Fred Giertz) — Mon, 18 Aug 2003 00:00:00 EST

Pension funding issues have an important, but often hidden impact on the finances of state governments. If pension systems are underfunded, governments must address this problem sooner or later through additional contributions to the systems. Capital gains have had a dramatic impact on state tax revenues in the last decade. However, the indirect effects of capital gains on state finances through state pension fund growth and decline have had an even greater, but overlooked effect on the long-term fiscal health of states. The last ten years has seen the rapid growth of state pension asset followed by two years of decline. Changes in pension fund asset/liability relationships have generated problems for states that are much larger than the current state budget shortfalls. Pension funding issues do not have the immediacy of the state budget shortfalls, but they must be considered when states address long term structural imbalance problems.

Capital Gains: Its Recent, Varied, and Growing (?) Impact on State Revenues

info@taxpolicycenter.org ( Sally Wallace) — Wed, 13 Aug 2003 00:00:00 EST

State governments derive their revenue from a number of sources, with the individual income tax being one of the most important. Fluctuations in economic activity, particularly in the level of wages and capital income, will influence the level of revenue generated from the income tax. This paper analyzes the impact of recent trends in capital gains realizations on state income taxes. We look at the growth of capital gains relative to the overall tax base and find that the significant growth in capital gains in the 1990s has added to the fiscal pressure that states now face.

Problems and Prospects for State and Local Governments

info@taxpolicycenter.org ( Brian Knight, Laura Rubin, Andrea Kusko) — Mon, 11 Aug 2003 00:00:00 EST

Using data from the National Income and Product Accounts, this paper analyzes the recent budget crisis in the state and local sector. Two factors primarily external to the sector-the economic slowdown and the decline in capital gains realizations-explain roughly one-third of the swing from surplus to deficit between 1998 and 2002 and two thirds of the swing between 2000 and 2002. However, policy and other factors, including tax reductions enacted by state governments and the recent acceleration in Medicaid spending, also have played an important role. In a historical comparison, we find that macroeconomic factors have played a less important role in the current crisis that they did in the crises of the early 1980s and early 1990s.

17 Percent of Families Have Stock Dividends

info@taxpolicycenter.org ( Leonard E. Burman, David L. Gunter) — Mon, 26 May 2003 00:00:00 EST

President Bush has proposed to eliminate individual income tax on most stock dividends and both houses of Congress have passed bills that would reduce or eliminate taxes on dividends, at least temporarily. This column looks at who has stock dividends and how dividend income is distributed.

Congress Morphs an 'Itty-Bitty' Tax Cut Into a Budget Buster

info@taxpolicycenter.org ( Leonard E. Burman, Peter Orszag) — Tue, 20 May 2003 00:00:00 EST

[Los Angeles Times] On May 15, the Senate passed a tax cut that would probably prove even more costly and less responsible than the Bush Administration. The president's dividend-relief proposal would cost almost $400 billion over the next 10 years. The Senate version could end up costing much more. Instead of ending the "double taxation" of corporate income, the Senate bill threatens to end all taxation of corporate income.

Taxing Capital Income Once

info@taxpolicycenter.org ( Leonard E. Burman) — Tue, 21 Jan 2003 00:00:00 EST

President Bush's recently proposed to eliminate the double taxation of corporate income. The proposal contains the germ of a good idea, but it is incomplete. Indeed, implementing it as is would be undesirable for several reasons: it would add to our burgeoning national debt and thus reduce economic growth; it would be highly regressive, and it would have little or no effect on the epidemic of corporate tax sheltersa growing phenomenon that is both inefficient and unfair. This paper proposes to address all of these deficiencies by coupling the Administration's proposal with full taxation of capital gains upon realization. The proposal would be revenue neutral, progressive, and would do more to improve the allocation of capital than the Administration's proposal.

About Half of Dividend Payments Do Not Face Double Taxation

info@taxpolicycenter.org ( William G. Gale) — Mon, 11 Nov 2002 00:00:00 EST

The United States is often said to maintain a classical tax system, under which corporate profits are subject to double taxation, once at the corporate level when they are earned, and again at the individual level when they are paid out as dividends. The Bush administration is reportedly considering corporate tax reform options in part because of concerns about double taxation. Dividends are not taxed twice if they are paid to nonprofit institutions or foundations; federal, state or local governments; public or private pension funds; and 401(k) plans or Individual Retirement Accounts.

Individual and Corporate Capital Gains Are Highly Correlated

info@taxpolicycenter.org ( Leonard E. Burman, George A. Plesko) — Mon, 28 Oct 2002 00:00:00 EST

A perpetual policy debate surrounds the proper taxation of capital gains. One concern is that the tax creates a "lock-in effect." That is, people will hold onto assets longer than they otherwise would in order to avoid the tax. If significant, the lock-in effect would represent an undesirable tax distortion in its own right. It might also mean that cuts in capital gains tax rates could pay for themselves, because the added revenues from induced realizations would offset the loss due to the rate cut.

The Answer Isn't Capital Gains : Commentary

info@taxpolicycenter.org ( Leonard E. Burman) — Sun, 30 Sep 2001 00:00:00 EST

(Houston Chronicle) Even before the ruins of the World Trade Towers stop smoldering, Congressional leaders are quietly planning to revive their favorite scheme to boost the economya $20 billion plus cut in capital gains taxes, possibly as an add-on to minimum wage legislation. Proponents, led by Senate Minority Leader Trent Lott, claim that a temporary cut in the already low tax rate on profits would both raise revenues and stimulate spending and investment. That's nonsense. While a capital gains tax cut would surely boost the bank accounts of the wealthy, it would not revive our flagging economy and might further destabilize the skittering stock market.

Taxing 'Bigness'

info@taxpolicycenter.org ( C. Eugene Steuerle) — Mon, 15 May 2000 00:00:00 EST

Senior Fellow Eugene Steuerle suggests that there are three major features of the U.S. multi-tiered tax structure that together reveal a fundamental distrust of "bigness:" (1) the graduated rate structure in the individual income tax; (2) the corporate income tax; and (3) the estate and gift tax.

Capital Gains Taxation and Tax Avoidance : New Evidence from Panel Data

Mon, 01 Dec 1997 00:00:00 EST

Previous theoretical analyses of the capital gains tax have suggested that investors have considerable opportunity to avoid the tax. Yet, past empirical work found little evidence of such activity. Though confirming past findings that avoidance of tax on realized capital gains is not prevalent, we observe that tax avoidance activity increased after the Tax Reform Act of 1986, and high-income, high-wealth and sophisticated taxpayers were most likely to avoid tax. However, we find that most tax avoidance is of short duration. Thus, the effective tax rate on realized capital gains is close to the statutory rate in all years and tax brackets.