Legal & Policy Challenges

Increase capital gains tax, lower income tax on highest brackets.

http://www.forbes.com/2009/01/29/irs-high-income-personal-finance-taxes_0129_wealthy_americans.html

 

"WASHINGTON, D.C.--The 400 highest-earning taxpayers in the U.S. reported a record $105 billion in total adjusted gross income in 2006, but they paid just $18 billion in tax, new Internal Revenue Service figures show. That works out to an average federal income tax bite of 17%--the lowest rate paid by the richest 400 during the 15-year period covered by the IRS statistics. The average federal tax bite on the top 400 was 30% in 1995 and 23% in 2002...

 

... the top 5% of earners--those with an adjusted gross income of $153,542 or more--now pay a higher effective tax rate than the top 400."

 

Democrats rightly say that the rich don't pay their fair share, while Republicans respond (quite truthfully) that those in the highest income tax brackets pay a confiscatory 35% tax, with Obama suggesting an increase to 39.5%.

 

However, the billionaires whose wealth comes mainly from capital gains pay much lower taxes than the millionaires who collect a salary for their work. This disparity is not going to get smaller by increasing the income tax. (To be fair, Obama is also advocating an increase in capital gains to 20%.)

 

Why is it that income from a day's work should be taxed at a higher rate than (largely) unearned investment gains?

 

I propose that we raise the capital gains tax and lower the top tiers of the income tax so that they are roughly comparable.

 

Real estate capital gains could be taxed at their current rate, so as not to adversely affect homeowners whose primary residence increases in value. (This is a minor detail that I am open to alternative suggestions.)

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Idea No. 3015