Top Combined Capital Gains Tax Rates Would Average Nearly 37 Percent Under House Dems’ Plan

September 14, 2021

House Democrats’ reconciliation legislation proposes raising the long-term capital gains tax rate to 25 percent and applying a new 3 percentage point surcharge on all income above $5 million of modified adjusted gross income. When including the net investment income tax of 3.8 percent under current law, the top marginal capital gains tax rate would reach 31.8 percent at the federal level.

That would be the highest federal tax rate on capital gains since the 1970s—and it would be above the generally estimated revenue-maximizing rate of 28 percent. The proposal should also be considered in the context of state-level capital gains taxes, which most states levy.

When considering state-level policies, the average top marginal combined tax rate on capital gains would be nearly 37 percent. Six states (Oregon, New Jersey, California, New York, Vermont, and Minnesota) and the District of Columbia would face combined top marginal capital gains tax rates of more than 40 percent, nearing the top rate among OECD countries, currently levied by Denmark at 42 percent.

A high combined capital gains tax rate would influence when taxpayers decide to sell assets and realize the gain. If the effect is large enough, federal revenue from capital gains income would decline as taxpayers decide to avoid realizing gains and the higher tax rate.

House Democrats capital gains tax rates in each state House Ways and Means reconciliation package.2

 

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A 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.