Which brings me to the second issue – the cost of a capital gains differential in terms of lost revenue and tax sheltering.
Think the preferential treatment of capital gains is inexpensive? Think again. The lower rate on such gains will cost the federal government an estimated $44 billion this year, according to the Office of Management and Budget. And that’s just the 15 percent rate on investments held for at least a year. It doesn’t include the capital gains exclusion on home sales ($31 billion) or on assets held at an owner’s death ($45 billion).
In addition, preferential treatment for capital gains complicates the tax code greatly. That’s largely why President Reagan and Congress decided to scrap it in the 1986 tax reform law. It creates huge incentives, as we see in the carried interest battle, for taxpayers to try to convert their regular income to capital gains.
The more sheltering, the more revenue the federal government loses, shifting the burden to finance government on everyone else. And the more sheltering, the more that well-to-do Americans can find ways to game the system, making the tax code less fair and fueling the cynicism that infects the body politic.
Besides, lower capital gains taxes lets people who earn their money by trading stocks and bonds pay a lower rate than people who, for lack of a better phrase, earn their money the old-fashioned way. That would include, for instance, doctors and dentists, scientists and engineers, teachers and police officers. What’s fair about that?
Nearly a quarter-century ago, President Reagan and Congress enacted a monumental piece of tax legislation that dramatically lowered tax rates while making the code fairer by, among other things, eliminating the capital gains differential. It was a good idea then, and it remains a good idea today.
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Lawrence J. Haas is former Communications Director to Vice President Gore and, before that, to the White House Office of Management and Budget. He's now a public affairs consultant who writes widely about foreign and domestic affairs, including fiscal policy.
