A much-needed reminder from Donald Marron over at TaxVox:
First, the 2001 and 2003 tax cuts are scheduled to expire. If that happens, the regular top rate on capital gains will rise to 20%. In addition, an obscure provision of the tax code, the limitation on itemized deductions, will return in full force. That provision, known as Pease, increases effective tax rates on high-income taxpayers by reducing the value of their itemized deductions. On net, it will add another 1.2 percentage points to the effective capital gains tax rate for high-income taxpayers.
And that’s not all. The health reform legislation enacted in 2010 imposed a new tax on the net investment income of high-income taxpayers, including capital gains. That adds another 3.8 percentage points to the tax rate.
Put it all together, and the top tax rate on capital gains is scheduled to increase from 15% today to 25% on January 1.
Well, that’s about 25 points too high since we should not be taxing long-term capital gains at all. And when you add in the 35 percent corporate tax, it means the U.S. will actually be taxing capital income at a confiscatory 60 percent! What would be the impact of getting rid of maltreatment of capital?
One tax reform plan is the Bradford X tax, a progressive consumption tax. It is a flat‐rate, firm-level tax on business cash flow and a graduated‐rate household‐level tax on wages, fringe benefits, and defined‐benefit pension payments. Households would not pay tax on interest, dividends, capital gains, or other income from saving. Firms would immediately deduct business investments, rather than depreciating them over time. One widely cited study estimates a 6.4 percent gain in long‐run output from the adoption of an X tax, which could result in a full percentage point gain—as a share of GDP—to government revenue.