Tax-exempt bonds have always been something of a two-edged sword. On one hand, they reduce borrowing costs for state and local governments. On the other, they suffer from both built-in inefficiencies and the potential for serious abuse. The newly enacted stimulus bill didn’t do much to prevent the abuses—indeed it includes eight separate provisions that would expand the use of bonds for a wide-range of purposes from housing to alternative energy. But it did add one provision that promises to make municipal bonds a far more efficient way for states and localities to raise money.
For years, Congress has preferred to use tax incentives rather than direct spending to encourage investment. Thus, while a home buyer may not care whether she gets a tax credit or a check from HUD, for example, Washington seems to have concluded that the tax subsidy is good while the check from HUD is bad. Never mind that both are, in reality, spending. This bit of political ledgerdemain has made it increasingly difficult for lawmakers to choose the most efficient way of delivering subsidies. But surprisingly, the current economic mess may be bringing some clarity to this issue.
Most American think that the tax rate on capital gains for most taxpayers is 15 percent. But that is far from the whole story. For example, gains from the sale of collectibles, such as art or wine, are taxed at higher rates—though, for taxpayers subject to marginal rates of 28 percent or above, still less than wages or interest are taxed. Then there are the gains on the sale of stock in a qualifying “small” business (with assets under $50 million). These profits are taxed at 14 percent—only a bit lower than the normal 15 percent rate. And even that advantage all but disappears for those small business owners hit by the Alternative Minimum Tax. For them, the effective capital gains rate is 14.98 percent.