By Richard Rubin
WASHINGTON -- The top capital-gains tax rate is a favorite policy lever for politicians -- and this year's presidential candidates want to yank it in sharply opposite directions.
President Trump said Thursday that he was seeking a 15% rate, down from today's 23.8%. Democratic rival Joe Biden would raise the top rate to 39.6% to match taxes on ordinary income.
Hundreds of billions of investors' dollars hang in the balance as the two sides spar over whether current tax policies choke off investment or deliver unjustifiably low burdens to the wealthiest Americans.
"There were a lot of Democrats who favored favorable capital-gains tax rates," said Alan Auerbach, an economist at the University of California, Berkeley. "As with a lot of other things between the two parties, the overlap has gone away."
Both campaigns are convinced that they are taking the politically popular side.
"I've never heard of a politician that got elected [saying] we are going to increase your taxes," Mr. Trump said on Fox Business on Thursday.
President Obama and Mr. Biden called for general tax increases on high-income households in 2008 and 2012; Democrats are now proposing to reverse many of Mr. Trump's tax cuts on top earners and then raise their burden higher.
" Donald Trump's decision to pitch a capital-gain tax cut to benefit the wealthy few, when every other aspect of the economy is in free fall, is a slap in the face to the middle class families struggling to get by," said Michael Gwin, a Biden spokesman.
For Mr. Trump, a capital-gains tax cut is part of a re-election policy agenda that is just now emerging three months before the election. His 2017 tax cuts didn't change capital-gains taxes. He also wants Congress to extend tax cuts that expire after 2025 and forgive payroll taxes that workers may be able to defer this fall under his recent executive action.
Larry Kudlow, the president's chief economic adviser, declined to say in an interview whether the proposed 15% rate includes a 3.8% investment-income tax that applies to capital gains, or whether that levy would remain separate and make the total rate 18.8%. Treasury Secretary Steven Mnuchin said this week that capital-gains rates should be reduced for the next few years to encourage investment.
Mr. Kudlow sees capital-gains cuts as an engine for economic recovery as the coronavirus pandemic recedes. And tax-cut advocates argue that it can have broad benefits if the economy and stock market rise.
"You want to help the blue-collars, cut the corporate tax rate. And I would put the capital-gains rate in that category," Mr. Kudlow said. "The Democrats talk about tax cuts for the rich and the public knows better."
But cutting investors' taxes may have limited impact.
"I don't see any investors who have $1,000 on the sidelines if only the capital-gains rate can drop five points," said Brian Riedl, senior fellow at the conservative Manhattan Institute. "It's just the wrong tool for the economy right now. Capital-gains rates are not holding the economy back."
Additionally, about three-quarters of stock in U.S.-based corporations is held by people or entities indifferent to capital-gains tax rates. That includes 401(k) plans, endowments and foreign investors.
Mr. Biden, by contrast, is proposing a fundamental transformation of capital-gains tax rules and suggesting that investment income and ordinary income face the same top tax rates. That hasn't happened since 1990.
Those changes would generate $448 billion over 10 years, or more than 10% of Mr. Biden's revenue goal, according to the Tax Policy Center, a Washington group run by a former Obama administration official. New research from Princeton University economist Owen Zidar suggests that capital-gains tax hikes may raise more revenue than previously estimated.
Mr. Biden's 39.6% rate would apply to people with incomes over $1 million. That figure includes the 3.8% investment-income tax. The total effective rate would be even higher for gains already subject to corporate taxes, as is the case now.
A tax on this small group of people matters, because that is where the money is. More than 75% of the benefit of today's lower rates on capital gains and dividends goes to households with incomes over $1 million, according to the Tax Policy Center.
Mr. Biden's new rules on taxation at death would mirror an Obama administration proposal that didn't advance.
Currently, someone who dies with appreciated assets isn't liable for income taxes on the difference between what they originally cost and what they were worth at death. Instead, heirs only pay taxes on gains that occur after the original owner's death and only then if they sell the assets.
Under Mr. Biden's proposal, capital-gains taxes would apply at death as if the asset were sold. This is separate from estate taxation.
Consider someone who bought stock for $1 million in 2010 and dies in 2021, when the stock is worth $3 million. Under current law, that person would owe no capital-gains taxes on a final income-tax return, and heirs would only owe taxes on gains above the $3 million value after they were to sell the assets. Under Mr. Biden's plan, the $2 million gain would be treated as income when the person dies, triggering a nearly $800,000 tax bill even if there were no sale.
That plan reduces the incentive for people to hold assets to wait for that zero tax rate. If investors know they will have to pay a 39.6% tax now or when they die, there is less of a reason to wait.
The plan's success would depend on details worked out in Congress and investors' perceptions of how permanent the rules are. Some investors may decide to wait to sell assets until a future president lowers tax rates again.
"If I'm not 90 years old and thinking very much about my mortality," Mr. Auerbach said, "I might think that I'm going to have some very good chance of not actually experiencing the change."
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