Impose 20 percent rate on capital gains and dividends

Under current law, long-term capital gains (on assets held at least a year) and qualified dividends face a maximum tax rate of 15 percent. Taxpayers with regular tax rates of 15 percent or less pay no tax on that income. Tax rates on both long-term gains and dividends are scheduled to revert to their pre-2003 levels in 2011: 20 percent on gains (10 percent for taxpayers in the 15 percent bracket and below)⁹ and regular tax rates on dividends. The president would make permanent the current maximum 15 percent rate on both kinds of income but would raise the rate to 20 percent for high-income taxpayers starting in 2011. The proposal would define high-income taxpayers as those in the top two tax brackets - couples with 2011 taxable income above $232,950 and single people with income over $192,000, with both values indexed for inflation.

The higher rate on capital gains and dividends would increase marginal tax rates on capital income for high-income taxpayers and could induce them to change their investment behavior. Affected taxpayers, anticipating the higher tax on long-term gains in the future, would likely realize more such gains in 2010 and less in 2011. Corporations might shift payment of dividends forward into 2010 and could reduce future dividends in favor of more retained earnings.

Footnote

9. Lower rates would apply to assets held for more than five years. The budget proposal would repeal that lower rate on long-held assets.

Additional Resources
Tax Policy Briefing Book: Key Elements of the U.S. Tax System: Capital Gains and Dividends http://www.taxpolicycenter.org/briefing-book/key-elements/capital-gains/index.cfm