As the possibility of increased tax rates approached at the end of 2012, dozens of executives sold stock and took advantage of lower tax rates. According to the Wall Street Journal’s analysis, executives off-loaded millions of dollars in stock in December, avoiding the higher tax rates Congress approved at the beginning of 2013. And because Congress raised rates on capital gains income, executives who sold well-performing stocks saved the most, the Journal reports:
A Wall Street Journal review of securities filings found that 58 executives sold stock valued at $10 million or more in December as talks intensified over raising tax rates.
Capital gains were hit more than other types of income, according to David Kautter, the managing director of the Kogod Tax Center at American University in Washington, D.C. “So if you could move that into 2012, you saved the most of anyone.”
Many of the executives who sold stock in December said they did not do so for tax purposes, and according to the Journal, their selling patterns mirrored those in previous months. Others, however, admitted that the sales occurred for “tax planning” purposes. Cablevision CEO James Dolan, who also manages Madison Square Garden and the New York Knicks, gained $26 million from stock sales in December. He had not previously sold stock since 2009. And Robert Kauffman, co-founder of an investment firm, retired and sold $180 million in stock after citing tax concerns as a main reason.
The decision to sell is certainly rational, though it is evidence for why Congress increased the capital gains rate from 15 percent to 20 percent. Capital gains were once taxed at 35 percent, but that rate has been steadily lowered over the last three decades. The result was a massive preference for investment income that allowed the wealthy to pay lower taxes on large segments of the money they made, concentrating wealth at the top. The low capital gains rate, in fact, was the biggest driver of America’s skyrocketing income inequality, according to a recent study. As the following two charts show, income concentrated with the wealthiest Americans as the capital gains rate fell: