Capital gains tax in the United States
In the United States, individuals and corporations pay a tax on the net total of all their capital gains. The tax rate depends on both the investor's tax bracket and the amount of time the investment was held. Short-term capital gains are taxed at the investor's ordinary income tax rate and are defined as investments held for a year or less before being sold. Long-term capital gains, on dispositions of assets held for more than one year, are taxed at a lower rate.[1]
Proposals[edit]
Simpson-Bowles[edit]
In 2011, President Barack Obama signed Executive Order 13531 establishing the National Commission on Fiscal Responsibility and Reform (the "Simpson-Bowles Commission") to identify "policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run". The Commission's final report took the same approach as the 1986 reform: eliminate the preferential tax rate for long-term capital gains in exchange for a lower top rate on ordinary income.[65]
The tax change proposals made by the National Commission on Fiscal Responsibility and Reform were never introduced. Republicans supported the proposed fiscal policy changes, yet Obama failed to garner support among fellow Democrats; During the 2012 election, presidential candidate Mitt Romney faulted Obama for "missing the bus" on his own Commission.[66]
In the 2016 campaign[edit]
Tax policy was a part of the 2016 presidential campaign, as candidates proposed changes to the tax code that affect the capital gains tax.
President Donald Trump's main proposed change to the capital gains tax was to repeal the 3.8% Medicare surtax that took effect in 2013. He also proposed to repeal the Alternative Minimum Tax, which would reduce tax liability for taxpayers with large incomes including capital gains. His maximum tax rate of 15% on businesses could result in lower capital gains taxes. However, as well as lowering tax rates on ordinary income, he would lower the dollar amounts for the remaining tax brackets, which would subject more individual capital gains to the top (20%) tax rate.[67] Other Republican candidates proposed to lower the capital gains tax (Ted Cruz proposed a 10% rate), or eliminate it entirely (such as Marco Rubio).[68]
Democratic nominee Hillary Clinton proposed to increase the capital gains tax rate for high-income taxpayers by "creating several new, higher ordinary rates",[69] and proposed a sliding scale for long-term capital gains, based on the time the asset was owned, up to 6 years.[69] Gains on assets held from one to two years would be reclassified short-term[70] and taxed as ordinary income, at an effective rate of up to 43.4%, and long-term assets not held for a full 6 years would also be taxed at a higher rate.[71] Clinton also proposed to treat carried interest (see above) as ordinary income, increasing the tax on it, to impose a tax on "high-frequency" trading, and to take other steps.[72] Bernie Sanders proposed to treat many capital gains as ordinary income, and increase the Medicare surtax to 6%, resulting in a top effective rate of 60% on some capital gains.[69]
In the 115th Congress[edit]
The Republican Party introduced the American Health Care Act of 2017 (House Bill 1628), which would amend the Patient Protection and Affordable Care Act ("ACA" or "Obamacare") to repeal the 3.8% tax on all investment income for high-income taxpayers[73] and the 2.5% "shared responsibility payment" ("individual mandate") for taxpayers who do not have an acceptable insurance policy, which applies to capital gains.[74] The House passed this bill but the Senate did not.
House Bill 1 (the Tax Cuts and Jobs Act of 2017) was released on November 2, 2017, by Chairman Kevin Brady of the House Ways and Means Committee. Its treatment of capital gains was comparable to current law, but it roughly doubled the standard deduction, while dropping personal exemptions in favor of a larger child tax credit. President Trump advocated using the bill to also repeal the shared responsibility payment, but Rep. Brady believed doing so would complicate passage.[75] The House passed H.B. 1 on November 16.
The Senate version of H.B. 1 passed on December 2. It zeroed out the shared responsibility payment, but only beginning in 2019. Attempts to repeal "versus purchase" sales of stock (see above),[76] and to make it harder to exclude gains on the sale of one's personal residence, did not survive the conference committee.[77] Regarding "carried interest" (see above), the conference committee raised the holding period from one year to three to qualify for long-term capital-gains treatment.[36]
The tax bills were "scored" to ensure their cost in lower government revenue was small enough to qualify under the Senate's reconciliation procedure. The law required this to use dynamic scoring (see above), but Larry Kudlow claimed that the scoring underestimated economic incentives and inflow of capital from abroad.[78] To improve the scoring, changes to the personal income tax expired at the end of 2025.
Both houses of Congress passed H.B. 1 on December 20 and President Trump signed it into law on December 22.
In March 2018, Trump appointed Kudlow the assistant to the President for Economic Policy and Director of the National Economic Council, replacing Gary Cohn.[79] Kudlow supports indexing the cost basis of taxable investments to avoid taxing gains that are merely the result of inflation, and has suggested that the law lets Trump direct the IRS to do so without a vote of Congress.[80][81] The Treasury confirmed it was investigating the idea, but a lead Democrat said it would be “legally dubious” and meet with “stiff and vocal opposition”.[82] In August 2018, Trump said indexation of capital gains would be "very easy to do", though telling reporters the next day that it might be perceived as benefitting the wealthy.[83]
Trump and Kudlow both announced a "phase two" of tax reform, suggesting a new bill that included a lower capital gains rate.[84] However, prospects for a follow-on tax bill dimmed after the Democratic Party took the House of Representatives in the 2018 elections.[85]