Tax Analysts Blog

Capital Gains: The Missing Link to Tax Reform?

Posted on Sep 26, 2012
The big stir about Romney's tax plan--that if you fill in the blanks with likely revenue raisers the plan will result in tax increase for the middle class--all stems from the fact that tax breaks are not evenly spread over income categories. Proportionately, the poor benefits most from the EITC, the middle class benefits most from the mortgage interest deduction, and the rich benefit most from capital gains. If you want to cuts rates and if you want to keep the same distribution of the tax burden--as most politicians do--it is hard to do without raising the rate on capital gains.

This is the main point of the testimony of David Brockway at a joint House-Senate hearing on capital gains last week. Brockway knows about these things. As Chief of Staff of the Joint Committee on Taxation he was probably the staff person most involved in the passage of the Tax Reform Act of 1986. His dispassionate analysis of the political and economic constraints at issue in enactment of real-world tax reform should be required reading for anybody interested in reform.

It should also be noted that the Bowles-Simpson, Rivlin-Domenici and the tax reform plan that President Reagan himself introduced in 1985 all included elimination of the capital gains preference. I don't think the authors of these plans set out with the intent of socking it to the rich. But when you start playing with numbers--and you impose the constraint of distributional neutrality--it is hard to leave capital gains off the table.

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