Download Special Report No. 148
Special Report No. 148
Executive Summary The nation may revisit the issue of capital gains taxation now that the Democratic Party controls the Congress. Republicans have been almost unanimous in their view that the rate cuts on capital gains and dividends in May 2003 were, among all the Bush 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. cuts, two of the most successful at boosting the economy. Democrats have mostly held the opposite view, asserting that compared to the rates on wages, capital income has long been under-taxed. In one respect, though, the parties may be able to agree on a reform to capital gains taxation: indexation of capital gains for inflation.
When Congress indexed income tax brackets for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. in 1981, it was considered such a daring reform that a four-year delay was built in. But in retrospect, like air conditioning, indexation seems like something we should never have had to live without. Inflation has increased the rate of capital gains taxation in wild fashion over the last 50 years. In some years the effective rate has been so much higher than the statutory rate that it mocked the idea of capital gains being taxed at a “preferential rate.” Even now, after two decades of modest inflation, indexation would be an excellent reform, improving the predictability of tax burdens on capital investment.
The occasional bill has been introduced in Congress to index capital gains. In the current Congress, it is H.R. 6057, sponsored by Representatives Mike Pence (R-IN) and Eric Cantor (R-VA). Although an unlikely prospect for enactment on its own, such a bill could become part of a fundamental tax reform plan.
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