At least five Republican presidential candidates support eliminating taxes on capital gains, proposing even deeper cuts than former President George W. Bush endorsed and standing in contrast to advocates of higher investment tax rates such as Warren Buffett.
Former Utah Governor Jon Huntsman became the latest candidate to back a zero tax rate on income from investments in a speech yesterday, pitching the idea as part of a job-creation plan that includes what he described as a revenue-neutral overhaul of the tax system.
“We will also eliminate taxes on capital gains and dividends, which will lower the cost of capital and encourage investment in the economy,” Huntsman said in a campaign speech in Hudson, New Hampshire, according to his prepared remarks.
According to published reports or their websites, Minnesota Congresswoman Michele Bachmann, Texas Congressman Ron Paul, former pizza executive Herman Cain and former House Speaker Newt Gingrich have said they back getting rid of the capital gains tax, which now has a top rate of 15 percent for most assets held for more than a year. That position puts them at odds with bipartisan deficit-reduction efforts over the past year that have called for lowering tax rates on ordinary income and taxing capital gains and wage income at the same rates.
Buffett Supports Increase
The Republican candidates’ positions also contrast with the stance taken by Buffett, the billionaire investor, and President Barack Obama, who are seeking an increase in capital gains rates for high-income Americans and maintain that the lower rates give the wealthy an undeserved tax break.
In an op-ed in the New York Times on Aug. 14, Buffett, chief executive officer of Berkshire Hathaway Inc., wrote that his 17.4 percent tax rate was lower than that paid by others working in his office because almost all of his income comes from capital gains.
“If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine,” he wrote. “But if you earn money from a job, your percentage will surely exceed mine -- most likely by a lot.”
Lawmakers have been arguing over the proper tax treatment of capital gains for decades.
The last overhaul of the U.S. tax code, in 1986, equalized the top capital gains and ordinary income tax rates at 28 percent.
“It fell apart quickly and failed miserably,” said Douglas Holtz-Eakin, former director of the Congressional Budget Office and now president of the American Action Forum, a Washington group that favors smaller government, said in an interview today.
Later increases in ordinary income tax rates and cuts in the capital gains rate created today’s disparity between the 35 percent top tax rate on wages and the 15 percent rate on investment income.
Obama wants to let the top tax rate on ordinary income return to 39.6 percent, starting in 2013. He also proposes setting the top capital gains rate at 23.8 percent that year.
Advocates of lower investment taxes said the type of changes being advanced by the presidential candidates would encourage riskier investments.
“At 15 percent, the rate is reasonably low,” said J.D. Foster, a senior fellow at the Heritage Foundation, a Washington research group that favors limited government. “But if you can bring it down even further, you’re going to get some economic benefit from that, unlike most of the economic proposals that are floating around.”
Foster, who was an economist at the Treasury Department and the Office of Management and Budget under Bush, said that administration focused on lowering dividend taxes, which had been taxed as ordinary income until a 2003 tax law set the top rate at 15 percent. That same law reduced the top capital gains rate from 20 percent to 15 percent.
Holtz-Eakin, who advised 2008 Republican presidential candidate John McCain, said he opposes eliminating the tax on capital gains income unless doing so is part of a broader overhaul of the tax code, preferably one that taxes consumption and not savings.
“To pretend you have an income tax and not tax all income is how you end up with what we’ve got,” he said.
Eliminating taxes on capital gains would encourage people to look for ways to qualify for the exemption, said Leonard Burman, a professor of public affairs at Syracuse University.
“It would turn what’s already a pretty big loophole in the tax law into one big enough to drive a truck through,” said Burman, a former Treasury Department official who has written about capital gains taxation. “You create this enormous bounty for making other income look like capital gains, and virtually any income tax shelter is designed to do just that.”
Eliminating capital gains taxes would benefit private equity and venture capital businesses. Managers in those industries tend to receive much of their compensation as carried interest, a share of investors’ profits that is taxed as capital gains.
Burman said investors would likely sell their holdings and replace them with new, similar assets to eliminate any untaxed gain, particularly if they were concerned that a zero tax rate would be temporary.
The benefits of lower rates on capital gains flow to people with the highest incomes. The top 20 percent of taxpayers receive 96 percent of the benefit from the current preferential rates on capital gains and dividends, according to the Tax Policy Center, a Washington research group.
Exempting capital gains from income would cut taxes for 4.3 percent of taxpayers and raise taxes for 6.8 percent, according to the Tax Policy Center. Roberton Williams, a senior fellow at the center, said the counterintuitive result stems from eliminating the deduction of capital losses.
Among households with annual earnings of more than $1 million, 53 percent would end up with tax cuts averaging $181,231. In that same income group, 38 percent of taxpayers would experience tax increases averaging $2,589.
Eliminating taxes on capital gains would widen the federal budget deficit. The current preferential tax rates on capital gains and dividends will result in $84.2 billion in forgone revenue for the Treasury this year, according to the congressional Joint Committee on Taxation.
Obama’s fiscal commission, headed by former Republican Senator Alan Simpson and former White House Chief of Staff Erskine Bowles, proposed taxing capital gains as ordinary income. That report, which was backed by Republicans including Senator Tom Coburn of Oklahoma, proposed lowering tax rates and eliminating tax breaks, resulting in a net increase in revenue compared with extending current tax policies indefinitely.
A proposal released earlier this year by the bipartisan “Gang of Six” in the Senate adopted a similar approach, without explicitly saying it would raise capital gains rates.
The presidential candidates, meanwhile, focus their deficit-cutting efforts solely on spending. Tax cuts, they maintain, boost economic growth.
“We ought to go to zero capital gains, which would attract hundreds of billions of dollars of investment in the U.S.,” Gingrich said on Fox News Channel on Aug. 4.
Mark Miner, a spokesman for Texas Governor Rick Perry, and Eric Fehrnstrom, a spokesman for former Massachusetts Governor Mitt Romney, didn’t respond to e-mailed requests for comment yesterday. Perry entered the race last month, and Romney is slated to announce his job-creation plan next week.
--With assistance from John McCormick in Chicago. Editors: Jodi Schneider, Justin Blum
To contact the reporter on this story: Richard Rubin in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Mark Silva at email@example.com
© Copyright 2014 Bloomberg News. All rights reserved.