Capital gains should be taxed as ordinary income

[Free-quent Flyer]

I recently wrote a post about how to calculate federal taxes on capital gains since it's something I've never had to do before, and it got me wondering about why this insane system of capital gains taxes exists in the first place. So I did a bit of research, and basically came up with three answers.

Capital gains are taxed at their nominal values, unadjusted for inflation

This is actually an interesting problem. If you invest in super-safe assets that return exactly the rate of inflation each year, the amount of money you withdraw will be worth exactly the same as the money you invested, but you'll owe taxes on the increase in nominal value.

The problem with saying that this is a problem that needs to be solved is that it suggests that all assets held in interest-free accounts should somehow be treated as capital losses, since the amount withdrawn is worth less than the amount deposited. Doing so would radically increase the complexity of the tax code, while affecting only a tiny number of taxpayers each year. Let's not do that.

Still, I'm vaguely comfortable with the idea of applying a deflating multiplier when determining the total amount of a capital gain. You could say something like, "for assets held 5 years or more, reduce the nominal value of your proceeds by the compounded rate of inflation during the period you held the asset, excluding the year of purchase and year of sale." That would be a little complicated, but the IRS could just include the relevant table in the instructions to Form 1040, Schedule D, and it would be a hell of a lot simpler than the current system.

Privileging capital gains offsets the advantages of debt over equity

The current tax code treats business interest as tax-deductible for the business, but requires businesses to pay business income tax on profits before distributing them to shareholders, who then have to pay taxes on the dividends as capital gains. This creates a distorting incentive to finance operations with debt instead of equity (which in economic theory should be identical, so-called "capital structure neutrality"). By privileging the tax treatment of dividends, this bias is somewhat reduced.

The solution is obvious: do not allow businesses to deduct interest from their corporate income taxes, and tax capital gains as ordinary income. Distortion: solved.

Taxing capital gains privileges current consumption over future consumption

This is an extremely curious argument but appears to me to be the core belief of people in favor of privileging capital gains over other kinds of income. Here is how the American Enterprise Institute (who are defending the capital gains preference) makes this argument: "Income taxation inherently imposes higher effective tax rates on those who save for future consumption than on those who consume today, because the returns to savings are taxed."

The only way I have been able to make sense of this statement is that they are suggesting that taxing capital gains as part of an income tax system imposes higher earned income taxes on savers by taxing the same earned income twice: once when it is earned and once when it is withdrawn, with gains, later on in order to finance consumption.

This argument does not make any sense, because savings are not taxed when they are withdrawn: your principal is entirely tax-free, since you already paid income taxes on it. The capital gains tax is, famously, only levied on capital gains, new income that is generated by the investment and the increase in the value of the invested capital.

The capital gains tax preference is the product of a conservative elite fever dream

After reading a number of articles from conservative publications defending the capital gains tax preference (see here, here, and here), it is my belief that the conservative establishment suffers under a particular, extremely curious belief: it is not money that makes a person rich, it is consumption that makes a person rich.

In other words, a person is not rich just because they own Dow Chemicals, an extremely valuable ($55.49 billion market cap) and profitable ($7.35 billion net revenue in 2015) company. The person is only rich to the extent that they convert their income from Dow Chemicals into yachts, mansions, racehorses, etc. Therefore, to the extent that that person chooses NOT to convert their ownership of Dow Chemicals into luxury goods, but instead lives a modest lifestyle, that person is not rich and should not be treated by the tax code as a rich person who should contribute to the administration of the state proportionally to their ownership of the nation's wealth.

This is a false belief, but it's not a provably false belief.

It is my belief that poor people are poor because they don't have enough money, and the fact that they are forced to spend 100% of their income to survive is an argument for taxing them more lightly, rather than more heavily. The belief that consumption, rather than income, should be taxed is an argument for taxing 100% of the income of the poor and a tiny fraction of the income of the rich — defining "rich" in the traditional method of "people who have high incomes and high net worth," rather than in the conservative elite definition of "people who spend a high proportion of their income."

 

[thepaul500]

Disagree. But I don't have time to respond as my money pit needs diving into.

 

[Haley]

Ok. I skimmed.
I think you may be on to something.

However you have no future in politics if you keep saying stuff like this.

 

[Free-quent Flyer]

Disagree. But I don't have time to respond as my money pit needs diving into.

If you get a recirculator you don't have to constantly be diving into it to prevent mold and algae from growing.

 

[Matt]

Not enough pictures for me. Tweeted it out as I'm sure there is a point in there somewhere.

 

[ukinny2000]

When I was living in the UK back in the day, CG was taxed as regular income, but the profit was adjusted for inflation. HMRC (the IRS over there) would publish tables to help you calculate the profit deflator based on month/year of purchase and sale. Not sure if that is still the case in the UK today. There was also an allowance if memories serves me right, that the first few thousand pounds of CG were exempt.

Personally, I too feel that all income should be treated equal, and exemptions applied to small initial amounts to help those with few assets as far as possible.

 

[sriki]

I have the opposite view. Capital gains shouldn't be taxed at all. The capital being invested has already been taxed. Once is enough.

I sometimes share this radical idea of no double taxation. But, that complicates a lot of things that I do not have answers to.

1. What to do with sales tax? Get rid of it?
2. What about gift and inheritance? They all have been taxed at some point.

Slightly off-topic, but, I would be in favor of removing every single exemption in the IRS tax code. We can still keep our tax brackets based on income levels but be done with exemptions.

Taxing capital gains as ordinary income decreases the incentive to invest in businesses, to grow the economy, and to take risks. Investment in businesses leads to more jobs, which allows for the poor to increase their incomes and start paying income tax.

This sounds like a talking point that TV pundits bang the table upon with.

 

[ukinny2000]

The capital has been taxed, but not the profits on it, so the gains have not been taxed at all.

I would also dispute the notion that taxing capital gains as ordinary income decreases incentive to invest. Punitive taxation disincentivises, sure, but at the rates that we are talking (and especially given the fact that business can take depreciations as deductions) they don't act as a disincentive.

I would point to this article that charts the level of CG taxation and growth in the US

http://www.forbes.com/sites/leonardburman/2012/03/15/capital-gains-tax-rates-and-economic-growth-or-not

Inheritance tax is tricky. For example, if I buy a stock at $10, and then some day in the future I sell it for $100, I should pay CG on the $90, but if I should die the day before I sell it, why should my inheritors get the $100 tax-free? Similarly, if I die the day after I sell it, why should they pay tax on the CG I just paid right before dying? Tough to figure out what the right way to do it is

 

[MickiSue]

I agree with you. And the idea that money growing to become more money should somehow be exempt from money earned through one's labor is positively un-American. It's laughable to think that people would actually try to defend not taxing the profits on investments, which are clearly only available to those who can already afford them, and yet many of those same people bitterly complain about a progressive tax on earned income, which could be lessened, if the billions in investment income were taxed equally.

I just erased a long screed about the assumptions that people make that are just plain wrong. But logic and data never convinced any one against their will. Believe what you will. Carry on.

 

[ukinny2000]

To those in the highest tax bracket, taxing cap gains as income seems punitive to me. That's roughly a doubling of the tax rate.

Not at all - you are taxing the gains, which up and until that point have had zero taxation.

Let's work through an example with some hypotheticals. let's assume you are taxed at 50%. You earn $1,000,000 pre-tax, which leaves you with $500,000 after paying Uncle Sam your 50%. You then invest all that money in some stock, and it grows 10x to $5,000,000. You then sell the stock. Your CG burden would then be $2,250,000 ($5,000,000 - $500,000 @ 50%). So you would have grossed $6,000,000 (the original $1,000,000 + $5,000,000) and paid $2,750,000 ($500,000 + $2,250,000). So as you can see, there is no double-taxing whatsoever

 

[redbirdsj]

Also disagree, at least under the current structure. Keep in mind, capital gains for investments in C-corps have already been taxed at the corporate level and the US has some of the highest corporate tax rates in the world. Taxing at ordinary income rates would drive taxes on corporate gains close to 75%.

 

[redbirdsj]

Not at all - you are taxing the gains, which up and until that point have had zero taxation.

Let's work through an example with some hypotheticals. let's assume you are taxed at 50%. You earn $1,000,000 pre-tax, which leaves you with $500,000 after paying Uncle Sam your 50%. You then invest all that money in some stock, and it grows 10x to $5,000,000. You then sell the stock. Your CG burden would then be $2,250,000 ($5,000,000 - $500,000 @ 50%). So you would have grossed $6,000,000 (the original $1,000,000 + $5,000,000) and paid $2,750,000 ($500,000 + $2,250,000). So as you can see, there is no double-taxing whatsoever

The double taxation comes from the fact that corporate earnings are taxed once at the corporate level and again when distributed to shareholders.

 

[Someone]

I like the complicated tax code. It creates hundreds of thousands of jobs. You know jobs are good, right?

Regular folks can debate the tax code on the internet till the end of time, but as long as the rest of us can pay a few guys to arrange things so we pay little to no tax, then it stays. End of story.

Oh yeah, while I'm at it, spending *billions* to recover millions held offshore and get foreign banks to rat on us is another great way to convince everyone else to pay their fair shares. Simply Genius.

Not me or my friends though. We just get our guys to scare up a few more nominee shareholders and paper around your "rules." Put that in your pipe and smoke it, Bernie.

I am a diamond!

 

[Mountain Trader]

Taxing capital at 15% and labor at 25, 35 or 45%. I think I understand why conservatives like that set-up.

A friend of mine is a prominent estate attorney. He says estate and gift taxes are optional.

 

[Matt]

Capital gains are taxed at their nominal values, unadjusted for inflation

This is actually an interesting problem. If you invest in super-safe assets that return exactly the rate of inflation each year, the amount of money you withdraw will be worth exactly the same as the money you invested, but you'll owe taxes on the increase in nominal value.

That assumes that you have no inherent loss for other asset classes. IE it doesn't matter that you actually might 'lose' money when the nominal return is lower than inflation, but that you are always losing something when inflation occurs and are being taxed on it. EG 6% ROR with inflation at 2% will offer a return of 3.92%, but your gain will be taxed on the 6%.

The belief that consumption, rather than income, should be taxed is an argument for taxing 100% of the income of the poor and a tiny fraction of the income of the rich

You could adjust that by having a phased out deduction or credit for those on a certain income level. That would address savers vs spenders and gifting/other non taxed movements of money.

The solution is obvious: do not allow businesses to deduct interest from their corporate income taxes, and tax capital gains as ordinary income. Distortion: solved.

An easy correlation is that of mortgage interest to the consumer. Why is this allowed? It encourages a person with equity to finance with debt.. many people like the idea of tax deductible debt even when they can pay off their home in full. What does this tax incentive really do?

• Encourages borrowing (fuels banks) which has a myriad of interconnected costs and benefits
• Encourages saving (everyone loves a bit of 10% stock market arbitrage on their 3% mortgage)
• Encourages building new homes and infrastructure

Similar things can be drawn from the business.

• Encourages dividends
• Encourages present growth
• Encourages new jobs/expansion

Disincentivizing companies to use debt will slow down growth. That might not be a bad thing as many companies shouldn't be around and are poorly run, but what would the broader impact be?

Also, we should consider a few things:

Capital Gains are taxed at ordinary income levels for short term - but not long term.. why?
With proper planning, capital gains can be avoided altogether, regardless of the rate. It takes a little restructuring of assets to do this, but when done properly there shouldn't be any paid. The tactics there are:

1. Cap loss harvest carryforward (a 5-6 figure buffer)
2. Step up basis
3. Donation of appreciated assets to charity to reduce OI
4. Transfer of appreciated assets by gifting into trust to freeze estate growth

Changing the rate doesn't stop these tactics, indeed, you'll be incentivizing more people to get more savvy about them, since the penalty for not using such planning techniques increases. Changing the rate penalizes the poor/uneducated again.

 

[Hanaleiradio]

Taxing capital at 15% and labor at 25, 35 or 45%. I think I understand why conservatives like that set-up....

Indeed. "You don't need a weatherman to know which way the wind blows."

 

[MickiSue]

Are you saying that because capital gains tax rates are less than 100% that people should be required to pay cap gains taxes at any rate up to 100%, at which point they would be unable to "afford" them? I genuinely can't follow this logic.



Or, if our government didn't spend half of our tax money on medicare/medicaid/food stamps/cell phones, etc.

The solution isn't to increase taxation, it's to cut spending...how revolutionary...

This post is an excellent example of the failure to convince someone by logic. Where in my post did you read that I think that capital gains should be taxed at 100%? I stated that it's illogical to tax the income of the wealthy (those with the disposable income to buy assets that earn capital) at a lower rate than the income of the employed.

And, when you claim that government spends HALF our money on items that A) are utterly unrelated (healthcare VS cell phones), when, in fact, more than half of the US budget, for many years, has been directed to the Pentagon, anything else you say is challenging to take even the tiniest bit seriously.

 

[MickiSue]

Here's the issue: please read more carefully. I spoke of the affordability of INCOME PRODUCING ASSETS. Not of taxes. The requirements for purchasing them, first and foremost, include having any discretionary income.

Whether you like it or not, there's a cost to living in a first world country. And it's not logical to put the burden of that cost equally on the shoulders of all citizens. For some, equality of cost to maintain our society means , literally, being unable to afford to live in it: consumption taxes can be the difference between having enough to pay rent on a crummy apartment, and not.

When societies are compared, over the millennia, those with progressive taxation thrived longer and more peacefully than those without.

Logic and data matter more than the wish of some privileged to become more privileged.

 

[Free-quent Flyer]

Glad I got this discussion going! I want to make a point about something that has come up here and is often mentioned when discussing taxes on capital gains.

It is perfectly true that corporate profit is taxed twice: once, at the corporate level, and a second time, when the profits are distributed to shareholders (it's only taxed once when distributed to bondholders, since interest on corporate debt is deductible from revenue at the corporate level, as mentioned in the OP. Zero-coupon bonds actually allow the corporation to deduct imputed interest each year even though it's only paid out at maturity).

But corporate profit is taxed differently at the corporate level and the individual taxpayer level. Marginal corporate tax rates can be found here: https://en.wikipedia.org/wiki/Corporate_tax_in_the_United_States#Federal_tax_rates

Then once the profits are distributed to shareholders, they are taxed at a progressive (long-term) rate of 0% to 20%/23.8%.

That creates combined corporate and individual tax rates which fall in the range of 15% (low-income corporation and low-income shareholder) to 58.8% (high-income corporation and high-income shareholder).

I say all this because it's essential to understand the following two points.

1) There are reasons why we tax corporate income in this way. By collecting taxes from corporations in the year they're earned rather than the year they're disbursed, you can keep corporations from retaining earnings until they'll be taxed as lightly as possible when distributed to shareholders. If capital gains and income tax rates change each time the political winds shift, shareholders will insist that distributions only be made in years with low tax rates. Likewise, by taxing corporate profit at the individual level, you can maintain some progressivity in the tax code by taxing lower-income individuals more lightly than higher-income individuals.
2) Eliminating either the corporate profit tax or the tax on capital gains would require either drastically increasing and making drastically more progressive the one that remains, or handing a huge tax cut to the wealthiest people in America while screwing over the poorest people in America. If you eliminate the corporate profit tax without raising the capital gains tax, then high-income shareholders will see a tax cut on capital gains from 58.8% to 23.8% while low-income shareholders will see a tax cut from 35% to 0%. If you eliminate the capital gains tax without raising the corporate income tax, high-income shareholders will see a tax cut from 58.8% to 35% and low-income shareholders will see their tax burden (35%) unchanged.

In other words, it's not enough to say "the same income shouldn't be taxed twice." If you passionately advocate a simplification of the tax code, as I do, then it's perfectly righteous to say "we need to simplify our taxation of corporate income." But when doing so, you have to be conscious of the reasons why we tax different income in the ways we do and of the consequences of changing that tax system. Otherwise, you're just shoveling more money into the ravenous maw of America's financial elite.

 

[TheBOSman]

Taxing capital gains as ordinary income decreases the incentive...to take risks.

Around 2005-2007 this might not have been the worst thing.

 

[Paul]

I have the opposite view. Capital gains shouldn't be taxed at all. The capital being invested has already been taxed. Once is enough.

Taxing capital gains as ordinary income decreases the incentive to invest in businesses, to grow the economy, and to take risks. Investment in businesses leads to more jobs, which allows for the poor to increase their incomes and start paying income tax.

Reality is most wealth is controlled by the top 1/10th of 1%. They aren't interested in anything but preserving their wealth. So the notion that taxing capital gains would decrease the incentives to invest and grow the economy, create jobs, etc etc, is ludicrous nonsense

 

[Matt]

I put @Free-quent Flyer on a 4 day ban for:

Breaching the peace
Encouraging public disorder
Various charges in relation to Space Corp directive 196156

 

[Free-quent Flyer]

@Matt tough, which I don't like, but fair, which I do like.

 

[ukinny2000]

I put @Free-quent Flyer on a 4 day ban for:

Breaching the peace
Encouraging public disorder
Various charges in relation to Space Corp directive 196156

Wait, does that make you Holly then? Or Rimmer?

 

[redbirdsj]

1) There are reasons why we tax corporate income in this way. By collecting taxes from corporations in the year they're earned rather than the year they're disbursed, you can keep corporations from retaining earnings until they'll be taxed as lightly as possible when distributed to shareholders. If capital gains and income tax rates change each time the political winds shift, shareholders will insist that distributions only be made in years with low tax rates. Likewise, by taxing corporate profit at the individual level, you can maintain some progressivity in the tax code by taxing lower-income individuals more lightly than higher-income individuals.
2) Eliminating either the corporate profit tax or the tax on capital gains would require either drastically increasing and making drastically more progressive the one that remains, or handing a huge tax cut to the wealthiest people in America while screwing over the poorest people in America. If you eliminate the corporate profit tax without raising the capital gains tax, then high-income shareholders will see a tax cut on capital gains from 58.8% to 23.8% while low-income shareholders will see a tax cut from 35% to 0%. If you eliminate the capital gains tax without raising the corporate income tax, high-income shareholders will see a tax cut from 58.8% to 35% and low-income shareholders will see their tax burden (35%) unchanged.

In other words, it's not enough to say "the same income shouldn't be taxed twice." If you passionately advocate a simplification of the tax code, as I do, then it's perfectly righteous to say "we need to simplify our taxation of corporate income." But when doing so, you have to be conscious of the reasons why we tax different income in the ways we do and of the consequences of changing that tax system. Otherwise, you're just shoveling more money into the ravenous maw of America's financial elite.

I'm also enjoying the discussion. Let's hope the ad hominem attacks (e.g. "logic failures") stop so we don't have the thread closed!

The point isn't that "the same income shouldn't be taxed twice." The point is that simply stating that capital gains should be treated the same as ordinary income ignores the fact that corporations already pay a substantial tax on their income- up to 39.1% combined state/federal which is the third highest in the world. Now I'm not going to pretend that all corporations actually pay that rate, as many have offshore tax shelter devices (especially tech companies) that allow them to pay lower effective rates on their worldwide income. Our capital gains rates aren't exactly competitive either, with an average top rate of over 28% (6th highest in industrialized world). Raising it further makes us uncompetitive with the rest of the world.

Around 2005-2007 this might not have been the worst thing.

We're talking about different things. Most would agree that creating moral hazards because managers don't have interests aligned with shareholders (i.e. don't share in the downside risk) or, in the case of banks, with implicit guarantors (taxpayers), behavior will not be optimal. The risk taking we are trying to encourage is that of entrepreneurs and investors who fully internalize the risks and benefits of their behavior.

 

[MickiSue]

@ redbird: Ad hom attacks attack the character of a individual. To state that a POSITION is illogical is both reasonable and allowable in any discussion.

To point out to someone in a discussion that they are misinterpreting one's own words is also reasonable and allowable. I'd add that if it's clear that someone is misinterpreting, or extrapolating unreasonably from another's words, that is also reasonable and allowable in a discussion.

The point of discussion is not to be nice, just as it's not to be nasty. The point of discussion is to, hopefully, find points of clarity, and even, if possible, agreement between the sides.

When either side is being snarky/foolish/attacking or deliberately misinterpreting for effect, neither of those goals is likely to be met.

 

[redbirdsj]

@ redbird: Ad hom attacks attack the character of a individual. To state that a POSITION is illogical is both reasonable and allowable in any discussion.

To point out to someone in a discussion that they are misinterpreting one's own words is also reasonable and allowable. I'd add that if it's clear that someone is misinterpreting, or extrapolating unreasonably from another's words, that is also reasonable and allowable in a discussion.

The point of discussion is not to be nice, just as it's not to be nasty. The point of discussion is to, hopefully, find points of clarity, and even, if possible, agreement between the sides.

When either side is being snarky/foolish/attacking or deliberately misinterpreting for effect, neither of those goals is likely to be met.

I agree that pointing out you think someone's position is illogical is not an ad hominem attack. I don't agree that implying that some people disregard logic because hey don't agree with your position is constructive to the discussion.

As some old jurist said long ago, "reasonable minds can differ."

 

[Hanaleiradio]

Federal tax policy gets real deep real quick, with thousands of interconnected parts. When I worked on the Hill it was the subject that glazed congressional eyes the quickest. Best reporting--really the ONLY thorough reporting in the entire country--of the significant changes to the tax code that were made during the Clinton and Bush (W) years was done by pulitzer prize winning NYT reporter David Cay Johnson. His first book on the topic, "Perfectly Legal, The Covert Campaign to Rig Our Tax System...." is a must read for anyone interested in the subject. As I recall, he has a couple of chapters that examine the changes to capital gains that were made during that period, as well as an excellent analysis of who benefits most from capital gains (at the expense of the overwhelming majority,) although much of the book's focus is on the nearly complete elimination of inheritance taxes.

Also noteworthy is some of the work done by Citizens for Tax Justice. On their website, search for "Capital Gains" and you'll be rewarded with a slew of papers and posts on the subject.

 

[Paul]

I'm also enjoying the discussion. Let's hope the ad hominem attacks (e.g. "logic failures") stop so we don't have the thread closed!

The point isn't that "the same income shouldn't be taxed twice." The point is that simply stating that capital gains should be treated the same as ordinary income ignores the fact that corporations already pay a substantial tax on their income- up to 39.1% combined state/federal which is the third highest in the world. Now I'm not going to pretend that all corporations actually pay that rate, as many have offshore tax shelter devices (especially tech companies) that allow them to pay lower effective rates on their worldwide income. Our capital gains rates aren't exactly competitive either, with an average top rate of over 28% (6th highest in industrialized world). Raising it further makes us uncompetitive with the rest of the world.

You misunderstand what an ad hominem attack means.

The tax rates you mentioned are "nominal" tax rates. Few corporations pay anywhere near those rates (large profitable corporations have enjoyed effective tax rates around 13% in recent years - a vast difference). Also, plenty of reputable studies show the effective tax rate US corporations pay is very similar to other countries with sizable economies and similar standards of living.

So let's drop this canard once and for all and enjoy an intellectually honest discussion.

 

[Paul]

If preservation of capital was the only goal, then most would have little of their net worth in equities or similarly risky securities, since these securities carry a higher risk than that of treasuries or similarly rated debt...and the reason they carry risk is the funds invested in equities/corp. debt are used by those corporations to grow their business, thereby creating jobs and growing the economy.

The wealthy have very little wealth tied up in "risky" investments. And what they do invest in enjoys rigged tax policy to protect their wealth. There is no legitimate reason a billionaire enjoys a vastly lower effective tax rate than his secretary/driver/gardener - or you or me (but maybe you're lazy and deserve to pay more taxes, eh?)

No surprise that the only real winners over the last few decades have been the top 1/10th - even the top 1% barely enjoyed rising income - heaven help you if you are in the 99%...

 

[redbirdsj]

You misunderstand what an ad hominem attack means.

Do you know what I was referring to?

The tax rates you mentioned are "nominal" tax rates. Few corporations pay anywhere near those rates (large profitable corporations have enjoyed effective tax rates around 13% in recent years - a vast difference). Also, plenty of reputable studies show the effective tax rate US corporations pay is very similar to other countries with sizable economies and similar standards of living.

So let's drop this canard once and for all and enjoy an intellectually honest discussion.

I'm talking about US income taxes. The studies you refer to are measuring the average tax rate on worldwide income for US-based corporations. That includes income from assets which are based overseas and which the US cannot tax, which is kind of the point. Our tax rates make the US as a domicile for those assets uncompetitive with other options. Much of the movement to lower US corporate tax rates involves repatriating those assets and the income they produce.

I'm no defender of special treatment for the wealthy. For example, I absolutely think the residential mortgage interest deduction is the product of special interest lobbying which includes the private wealth lobbyists. Same for the VC/PE funds' capital gains treatment on "carried interests." I just don't want to throw out the baby with the bathwater. I don't think blanketly advocating to raise capital gains rates to ordinary income levels is the solution.

 

[Hanaleiradio]

I have this great pie chart derived from IRS income data that compares capital gains shares by income group in 1999 and 2007. Tried to upload the file but it was too large, so will have to recite:

Total cap gains reported in 1999: $654 billion. Total Cap gains reported in 2007: $917 billion.

1999 % of cap gains going to those with incomes:
--under $100k: 13.9%
--$100k to $1m: 35.5%
--$1m to 10m: 28.3%
--over $10m: 22.3%

2007 % of cap gains going to those with incomes:
--under $100k: 5.3%
--$100k to $1m: 28.6%
--$1m to $10m: 23.7%
--over $10m: 42.4%

I used to have draft numbers from 2012, but can't put my hands on them. IIRC, (and thats a big if), the share of cap gains going to those making less than $100k slipped further to 4.8%, while the share going to those with incomes over $10m grew to 44%. There were just over 8,000 tax returns filed with reported incomes over $10m.

Although cap gains have always accrued disproportionately to the wealthy, in the previous century they rarely played such an outsized role in redistributing income to the very wealthiest .1%. There is even a reasonable argument to be made that for much of the post-war era they served a useful economic function.

The trend depicted by the numbers above resulted from intentional adjustments to the tax code, starting in the Reagan years and continuing unabated through the end of W's tenure. We don't need to eliminate capital gains to scale back the extreme income redistributive impacts they currently have. There's a handful of legislative and regulatory fixes that could make a hugh difference (see the CTJ website for examples.) Ironically, there are a number of large, non-financial business groups who are willing to trade off support for some of these fixes in exchange for relief in other areas (corporate tax issues being one.) But standing in the way of any kind of horse trading are the Ayn Rand disciples in the House (Paul Ryan is exhibit A). They see nothing upsetting in those numbers, believing that they represent the cream rising to the top, survival of the fittest. Until they're replaced by pragmatists, its hard to see anything changing.

 

[Matt]

Sorry about the upload issue, please PM/email etc in future and I'll see if I can change it rather than have you type things out.