How Would the Presidential Candidates’ Tax Plans Impact Capital Gains?
March 31, 2016
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 tax rates up to 43.4 percent (39.6 percent top rate, plus a surtax 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 deduction. He would also replace the corporate income tax and payroll tax 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 base.
One of the tax changes he would make is that he would reduce the long-term capital gains tax rate to 15 percent. This would bring the top marginal tax rate 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 tax 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 tax. 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.