Nearly all of the discussion regarding the scheduled expiration of the Bush tax cuts at the end of the year has focused on the effect the expiration would have on marginal income tax rates. But there were other facets of the Bush tax cut package, including cutting the capital gains and stock dividends rates to 15 percent.
President Obama has proposed increasing the rates on capital gains and stock dividends back to 20 percent for those making $250,000 or more. Republicans, meanwhile, have opposed allowing the increase to occur. And now they’ve been joined by 47 House Democrats:
Forty-seven House Democrats have signed a letter to Speaker Nancy Pelosi urging that tax rates on capital gains and dividends be maintained at the current level of up to 15% for all earners…The letter from House Democrats argues that raising taxes on dividends and capital gains would be harmful to companies’ ability to grow and add jobs.
The rationale for having a lower capital gains and dividend rate is that it will encourage investment, as investors will want to take advantage of a lower rate. Under President Clinton, the capital gains rate was 20 percent, while dividends were treated as regular income, so Obama is proposing a tax policy even more deferential to these sorts of income than was in place in the 1990’s. Plus, as Citizens for Tax Justice pointed out, these House Democrats are to the right of President Reagan when it comes to investor income:
In 1986, President Ronald Reagan signed into law the Tax Reform Act that ended the tax preference for capital gains and taxed all types of income at the same rates. Conservatives have long complained about this Reagan tax reform, and have even incorrectly claimed that capital gains tax revenue actually fell as a result of it…Today, conservative critics of President Reagan have been joined by a group of House Democrats who also seem to feel that Reagan was not sufficiently devoted to tax preferences for the wealthy investor class.
Of course, Obama hasn’t proposed evening the rates between regular income and investment income either, but to think that wealthy investors need a capital gains rate 20 points below the top marginal income tax rate (currently 35 percent) in order to invest their money is silly. Do conservatives, and these House Democrats, really believe that the wealthy will squirrel away their money under the mattress if the capital gains rate goes back to the level at which it was under Clinton? In fact, business investment was stronger under President Clinton that it was under President Bush.
The overwhelming majority of capital gains go to the richest households. Keeping that rate so far below the rates applied to normal income is simply a giveaway to the wealthy that doesn’t boost the economy.