Under current law, capital gains have a two-tiered structure. Short-term capital gains (gains on assets held for less than one year) are taxed as ordinary income, at taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates up to 43.4 percent (39.6 percent top rate, plus a surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. of 3.8 percent). Long-term capital gains (those held for more than one year) are taxed at a lower tax rate of up to 23.8 percent.
All of the current presidential candidates have proposed changing how the tax code treats capital gains. Some would greatly alter how they are taxed, and others would keep it about the same, but lower the tax rate.
Hillary Clinton has arguably the most interesting provision for changing the treatment of long-term capital gains.
Her plan would stick to the basic principles of the current system: ordinary tax treatment for short-term gains and lower rates for long-term gains. However, her plan would stretch out the schedule, requiring people to hold on to gains for more than six years in order to get the lower 23.8 percent tax rate. The tax rate would gradually decline from the ordinary rate.
The reason that she would alter the capital gains treatment this way is that she is concerned about what she calls “quarterly capitalism.” She thinks that businesses are too concerned about showing short-term successes and thus don’t invest enough in long-term projects that would boost the well-being of workers. She believes that encouraging investors to hold on to stock longer will help. However, we and others have questioned whether the proposal would actually accomplish its stated goal. In addition, the proposal would end up reducing revenue somewhat in the short-run because it would be successful in delaying realizations.
Senator Ted Cruz has proposed a significant overhaul to the tax system. He would replace the current income tax with a flat 10 percent tax on all income with a large standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. . He would also replace the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. with a 16 percent “Business Transfer Tax” or Value-added tax.
One of the key elements of his 10 percent income tax is that he would get rid of many deductions and credits and would also treat all income the same. As such, his plan would replace the current two tiered system for capital gains (long-term vs. short-term) and simply tax all capital gains as ordinary income. Usually, many people are very skeptical of this because treating capital gains as ordinary income raises the cost of capital and places a much higher burden on corporate income under current law. However, Cruz’s plan wouldn’t actually increase taxes on gains overall because the tax rate on all income would decline significantly to 10 percent.
John Kasich is the only candidate that has not released the details of his tax plan. However, he has released a few guiding principles and ideas about what he would like to do if he were elected. By and large, what he calls for is similar to many of the other Republican proposals: marginal rate cuts on individual and business income paired with important structural changes to the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. .
One of the tax changes he would make is that he would reduce the long-term capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. rate to 15 percent. This would bring the top marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. to where it was before 2012. It is unknown, however, whether he would also eliminate the 3.8 percent surtax on capital gains. So the actual rate could be 18.8 percent.
Bernie Sanders has put forth a number of new social policies such as free college tuition, paid family leave, and “Medicare for All.” In order to pay for his spending priorities, he proposed a number of new taxes such as a new employer-side payroll tax of 6.3 percent, a new 2.2 percent flat income tax, and a financial transactions tax. He would also greatly increase the progressivity of the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. by increasing the top marginal tax rate to 54.2 percent (52 percent plus the new 2.2 percent).
For most people, the treatment of capital gains won’t significantly change. For taxpayers under $250,000, long-term capital gain will be treated the same as under current law, but they would pay a little bit more due to the new 2.2 percent income tax.
For those taxpayers over $250,000, capital gains would be treated as ordinary income. Since ordinary income tax rate go up under the Sanders plan, the tax rate on capital gains for those earning over $250,000 would go up by a lot. The top marginal tax rate on capital gains would go up from 23.8 percent to 54.2 percent. This is a much higher rate than what we have seen in the United States on capital gains in the past and combined with state and local taxes on capital gains, would make our rate the highest in the developed world.
Donald Trump proposed a tax plan that would cut taxes for most Americans. His plan would reduce top marginal tax rate on ordinary income by 25 percent. It would cut the corporate income tax rate from 35 percent to 15 percent. It would also eliminate the AMT and the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. . His plan would also exempt the first $25,000 ($50,000 married filing jointly) from the income tax. He proposes broadening the tax base a bit by limiting itemized deductions somewhat, but the plan still ends up being a significant tax cut. It would reduce tax revenue by about $12 trillion.
While his plan would reduce federal revenue the most out of all the candidates, he arguably does the least to the treatment of capital gains and dividends. He would keep the top marginal tax rate at 20 percent, but he would eliminate the 3.8 percent surtax on capital gains, bring the rate down from 23.8 percent.Share