Report: Capital gains rates could play crucial role in tax reform

In all, CRFB estimates that the current capital gains rates – which are classified as a tax expenditure – will cost around $1 trillion over a decade, though the Congressional Budget Office reports combined figures for capital gains and dividends.

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The 1986 tax reform left both capital gains and ordinary income with a top rate of 28 percent. But the top individual rate was raised just a few years later, and the rates for investment income have been significantly lower than ordinary rates for more than a decade.

President Obama’s fiscal commission proposed to again tax capital gains as the same rate as ordinary income. House Ways and Means Committee Chairman Dave Camp (R-Mich.) and Senate Finance Committee Chairman Max Baucus (D-Mont.) have so far refused to take much off the table when it comes to crafting a tax reform plan.

Critics of lower capital gains rates say it can encourage tax sheltering and brush aside the idea that raising rates for investment income will stunt risk-taking.

The CFPB paper does say, however, that raising capital gains rates too high could be a revenue loser and sets 30 percent as the “revenue-maximizing” rate.

Wealthy investors are also facing an additional 3.8 percent tax on unearned income due to the president’s healthcare law.