Capital gains tax in the United States
The Fifth Circuit Court of Appeals, in Byram v. United States (1983), set out criteria for making this decision and determining whether income qualifies for treatment as a capital gain.
The Tax Reform Act of 1986 repealed the exclusion of long-term gains, raising the maximum rate to 28% (33% for taxpayers subject to phaseouts).
[11] The Taxpayer Relief Act of 1997 reduced capital gains tax rates to 10% and 20% and created the exclusion for one's primary residence.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the rates to 5% and 15%, and extended the preferential treatment to qualified dividends.
In 1995, to support the Contract with America legislative program of House Speaker Newt Gingrich, Stephen Moore and John Silvia wrote a study for the Cato Institute.
[24] The lower rate on long-term capital gains, compared to the rate on ordinary income, is regarded by the political left, such as Sen. Bernie Sanders, as a "tax break" that excuses investors from paying their "fair share",[19][25] or a "tax expenditure" that government could elect to stop spending.
[26] By contrast, Republicans favor lowering the capital gains tax rate to induce saving and investment.
In her 2016 presidential campaign, Hillary Clinton advocated holding periods of up to six years with a sliding scale of tax rates.
[32] It has been criticized as "indefensible" and a "gross unfairness",[33] because it taxes management services at a preferential rate intended for long-term gains.
[34] One counterargument is that the preferential rate is warranted because a grant of carried interest is often deferred and contingent, making it less reliable than a regular salary.
[35] The 2017 tax reform established a three-year holding period for these fund managers to qualify for the long-term capital-gains preference.
[36] The capital gains tax raises money for government but penalizes investment (by reducing the final rate of return).
[38] Congress sometimes directs the Congressional Budget Office (CBO) to estimate the effects of a bill to change the tax code.
[42] Mark LaRochelle wrote on the conservative website Human Events that cutting the capital gains rate increases employment.
He presented a U.S. Treasury chart to assert that "in general, capital gains taxes and GDP have an inverse relationship: when the rate goes up, the economy goes down".
He also cited statistical correlation based on tax rate changes during the presidencies of George W. Bush, Bill Clinton, and Ronald Reagan.
[43] However, comparing capital gains tax rates and economic growth in America from 1950 to 2011, Brookings Institution economist Leonard Burman found "no statistically significant correlation between the two", even after using "lag times of five years."
They may be accompanied by other measures to boost investment, and Congressional consensus to do so may derive from an economic shock, from which the economy may have been recovering independent of tax reform.
A taxpayer can move and claim the primary-residence exclusion every two years if living in an area where home prices are rising rapidly.
[51] Bankruptcy of an employer that induces a move to a different city is likely an unforeseen event, but the exclusion will be pro-rated if one has stayed in the home less than two years.
[68] Democratic nominee Hillary Clinton proposed to increase the capital gains tax rate for high-income taxpayers by "creating several new, higher ordinary rates",[69] and proposed a sliding scale for long-term capital gains, based on the time the asset was owned, up to 6 years.
[69] The Republican Party introduced the American Health Care Act of 2017 (House Bill 1628), which would amend the Patient Protection and Affordable Care Act ("ACA" or "Obamacare") to repeal the 3.8% tax on all investment income for high-income taxpayers[73] and the 2.5% "shared responsibility payment" ("individual mandate") for taxpayers who do not have an acceptable insurance policy, which applies to capital gains.
Its treatment of capital gains was comparable to current law, but it roughly doubled the standard deduction, while dropping personal exemptions in favor of a larger child tax credit.
President Trump advocated using the bill to also repeal the shared responsibility payment, but Rep. Brady believed doing so would complicate passage.
[77] Regarding "carried interest" (see above), the conference committee raised the holding period from one year to three to qualify for long-term capital-gains treatment.
[36] The tax bills were "scored" to ensure their cost in lower government revenue was small enough to qualify under the Senate's reconciliation procedure.
[79] Kudlow supports indexing the cost basis of taxable investments to avoid taxing gains that are merely the result of inflation, and has suggested that the law lets Trump direct the IRS to do so without a vote of Congress.
[80][81] The Treasury confirmed it was investigating the idea, but a lead Democrat said it would be “legally dubious” and meet with “stiff and vocal opposition”.
[82] In August 2018, Trump said indexation of capital gains would be "very easy to do", though telling reporters the next day that it might be perceived as benefitting the wealthy.
[83] Trump and Kudlow both announced a "phase two" of tax reform, suggesting a new bill that included a lower capital gains rate.
