Allow resumption of 20 percent rate on long-term capital gains for high-income taxpayers
In 2011 and 2012, long-term capital gains (gains on assets held at least a year) face a maximum tax rate of 15 percent. Taxpayers with regular tax rates of 15 percent or less pay no tax on that income. Under current law, tax rates on long-term gains are scheduled to revert in 2013 to their pre-2003 levels of 10 percent for taxpayers in the 15 percent bracket and below and 20 percent for taxpayers in higher tax brackets.*The president would also allow the rate to rise to 20 percent starting in 2013, but only for high-income taxpayers. The proposal defines high-income taxpayers as those in the top two tax brackets: couples with 2013 taxable income above $241,900 (half as much for couples filing separately), single filers with income over $199,250, and heads of household with income over $222,750, with all values indexed for inflation.
The higher rate on capital gains could induce taxpayers to hold on to assets with accrued gains and therefore realize fewer taxable gains. If people expect the president’s budget to go into effect, they may also change the timing of gains realizations. Anticipation of higher taxation of long-term gains after 2012 would lead affected taxpayers to realize more gains in 2011 and 2012 and fewer in 2013 and subsequent years.
Reduce the tax rate on qualified dividends to 20 percent rate for high-income taxpayers
In 2011 and 2012, 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. Under current law, qualified dividends will be taxed at regular tax rates in 2013. The president would reduce the tax rate in 2013 to 20 percent for taxpayers in the top two tax brackets—couples with 2013 taxable income above $241,900 (half as much for couple filing separately), single filers with income over $199,250, and heads of household with income over $222,750, with all values indexed for inflation—and maintain the current 15 percent and 0 percent rate schedule at lower incomes. This provision would cost nearly $124 billion through 2021.**
The higher rates on capital gains and dividends would increase marginal tax rates on capital income for high-income taxpayers and could reduce private saving. It also might cause corporations to accelerate some dividend payments forward into 2012 to take advantage of the current lower rate.
Tax Policy Briefing Book: Key Elements of the U.S. Tax System: Capital Gains and Dividends.
*Lower rates (18 percent and 8 percent, respectively) would apply to assets held for more than five years. The budget proposal would repeal the lower rates on long-held assets.
**The $124 billion revenue loss includes a small offsetting revenue gain from eliminating the 8 percent and 18 percent tax rates on capital gains on assets held at least five years.