The benefits of lower rates on capital gains flow to people with the highest incomes. The top 20 percent of taxpayers receive 96 percent of the benefit from the current preferential rates on capital gains and dividends, according to the Tax Policy Center, a Washington research group.
Counterintuitive
Exempting capital gains from income would cut taxes for 4.3 percent of taxpayers and raise taxes for 6.8 percent, according to the Tax Policy Center. Roberton Williams, a senior fellow at the center, said the counterintuitive result stems from eliminating the deduction of capital losses.
Among households with annual earnings of more than $1 million, 53 percent would end up with tax cuts averaging $181,231. In that same income group, 37.6 percent of taxpayers would experience tax increases averaging $2,589.
Eliminating taxes on capital gains would widen the federal budget deficit. The current preferential tax rates on capital gains and dividends will result in $84.2 billion in forgone revenue for the Treasury this year, according to the congressional Joint Committee on Taxation.
Obama's fiscal commission, headed by former Republican Senator Alan Simpson and former White House Chief of Staff Erskine Bowles, proposed taxing capital gains as ordinary income. That report, which was backed by Republicans including Senator Tom Coburn of Oklahoma, proposed lowering tax rates and eliminating tax breaks, resulting in a net increase in revenue compared with extending current tax policies indefinitely.
Similar Approach
A proposal released earlier this year by the bipartisan "Gang of Six" in the Senate adopted a similar approach, without explicitly saying it would raise capital gains rates.
The presidential candidates, meanwhile, focus their deficit-cutting efforts solely on spending. Tax cuts, they maintain, boost economic growth.
"We ought to go to zero capital gains, which would attract hundreds of billions of dollars of investment in the U.S.," Gingrich said on Fox News Channel on Aug. 4.
Mark Miner, a spokesman for Texas Governor Rick Perry, and Eric Fehrnstrom, a spokesman for former Massachusetts Governor Mitt Romney, didn't respond to e-mailed requests for comment yesterday. Perry entered the race last month, and Romney is slated to announce his job-creation plan next week.