Tax Break on Capital Gains Set to Expire Unless Congress Acts
Part of the “Fiscal Cliff” You Haven’t Heard Much About
One of the issues that Congress has to settle in the next month or two is whether to continue to tax capital gains income from investments at a significantly lower rate than most ordinary income. If that change is extended beyond its scheduled expiration at the end of 2012, it will continue a tax break that disproportionately benefits the very wealthy.
The current tax break on capital gains income is one of many tax cuts and spending measures that will expire in 2013 if Congress does not extend them. Many policymakers and candidates agree that letting all of them end would cause a huge shock to the national economy, and their termination is often referred to as the “fiscal cliff.” However, since Congress probably can’t afford to extend all of them, we need to take a close look at which ones really deserve to be extended.
Through the end of the year, capital gains income is often taxed at a reduced rate of 15%. Unless Congress extends this tax break, the rate on long-term capital gains will rise to 20%, with some investors paying an additional 3.8% surtax on capital gains.
Most capital gains income goes to the biggest earners. In Wisconsin, the top 0.1% of tax filers – that is, one out of every thousand tax filers – earned 48% of all capital gains income in 2010, as shown in the chart below. The top three percent of Wisconsin tax filers, with adjusted gross incomes of more than $200,000, earned just under three-quarters of capital gains income. In contrast, tax filers earning less than $100,000, who make up nearly 9 out of 10 tax filers in Wisconsin, brought home just 13 percent of capital gains income.
The Center on Budget and Policy Priorities highlights several aspects of the capital gains tax that would point towards letting the tax break expire, including “there’s no evidence that low capital gains tax rates boost the stock market, investment or economy,” and “a large share of capital gains is never subject to the capital gains tax rate,” if the capital gains are part of an estate.
As Congress weights the benefits and costs of continuing the various tax breaks that expire at the end of the year, it should remember that almost all of the benefit of capital gains tax break goes to the people with the highest incomes.