In an era of profound inequality, few issues illustrate such stark differences in economic priorities as capital gains taxes. Capital gains accrue overwhelmingly to the wealthy and receive favorable tax treatment in several ways.
Cutting capital gains taxes would confer another windfall on the wealthy, exacerbate the tax preference for income from wealth over income from work, increase inequality, and drain revenue.
By contrast, raising capital gains taxes and closing loopholes would make the wealthy pay more of their fair share, lessen tax code disparities, reduce inequality, and raise substantial revenue for the country.
Capital gains and dividends accrue overwhelmingly to the wealthy and are taxed at preferential rates
A capital gain is the profit from selling an asset such as a stock or other financial instrument, an interest in a business, or real estate. The gains from the sale of such assets held more than one year are considered long-term gains and taxed at special low rates.
While ordinary income such as wages and salaries is taxed at rates ranging from 0 percent for low levels of income to 37 percent for the highest levels of income, long-term capital gains are taxed at 0 percent, 15 percent, and 20 percent.
Most corporate dividends that are paid to shareholders are also taxed at these favorable rates. There is also a 3.8 percent Medicare tax on high-income taxpayers’ net investment income, including capital gains and dividends.
The 3.8 percent net investment income tax (NIIT) was enacted in companion legislation to the Affordable Care Act in 2010 and essentially parallels the Medicare tax on wages.1
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Sep 28, 2020 — Congress should close—not expand—capital gains loopholes and tax income from wealth the same as income from work.