Thursday, January 10, 2019

Graduated Capital Gains Tax

This is Joseph.

There has recently been discussion about raising the top marginal income tax rate to 70% in the United States.  But the top 0.1% of earners manage to harvest the bulk of capital gains as well as income, and capital gains have the potential to be a much bigger source of income.  They are also taxed a low and fixed rate.

The reason for this treatment, in my opinion, is due to their role in housing appreciation.  I buy a house for $100,000.  Houses double in value.  I decide to move to an equal house somewhere else in the same city (maybe I change jobs and need a shorter commute) but now I owe the difference between the $100,000 that I bought the house for and the $200,000 that it is now worth.  If capital gains taxes where 40%, that would be a huge tax on an efficiency improving move. It's so obviously bad there is an exemption for home sales.

But what about other capital gains?  An idea that Canada has played with is a lifetime exemption for capital gains tax.  This allows for a higher tax rate (Canada halves it and then applies ordinary income tax).  But note a great feature of this system.  Poor people with small amounts of capital gains are not taxed on them at all due to their tax bracket (homes are handled via the lifetime limit where you can exempt a lot of appreciation from homes).

But it allows one to set very high rates of taxation for the wealthy.  It also makes it a lot harder to shift income between ordinary income and (for example) stock options to reduce tax liability.  I think pairing these reforms and making the capital gains tax graduated according the ordinary tax schedule would be a great pairing.  Sure, Mitt Romney will still find ways to get a lower effective tax rate.  But it would make it harder to insulate huge amounts of wealth, especially if we went after tax havens.

Something to think about.

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