The bipartisan tax code signed by President Reagan in 1986 set both income tax and capital gains rates at 28 percent. Since that time, increases in income tax rates together with reductions in capital gains rates have resulted in the 20 percent margin between the two rates that exists today. The capital gains tax rate is scheduled to increase on January 1, 2013 which will reduce that margin to 15 percent. President Obama is in favor of this increase while presidential hopeful, Mitt Romney, is against it. In addition, Obama is in favor of raising ordinary income tax rates while tax settlements Romney is in favor of decreasing them. Any of these proposed changes will be significant and are certain to be taken in to consideration by businesses and individuals when making decisions about the allocation of their assets.
The Current, Scheduled and Proposed Tax Rates
- Current Rates
The top capital gains rate is currently 15 percent while the top ordinary income tax rate is 35 percent. - Scheduled Rates for 2013
The top capital gains rate is scheduled to increase to 20 percent for households earning $200,000 or less and to 23.8 percent for households earning more than that amount. There is no scheduled increase for the top income tax rate. - Proposed by Obama
Obama’s most recent budget proposes raising the top capital gains rate to 23.8 percent and the top income tax income tax rate to 39.6 percent.
Proposed by Romney
Romney has proposed eliminating the capital gains tax altogether for households earning $200,000 or less and setting the top rate at 15 percent for households making more than that amount. He proposes reducing the top ordinary income tax rate to
The Arguments
- In Favor of a Preferential Tax Rate for Capital Gains – Those in favor of a preferential tax rate for capital gains say the lower tax rate helps to mitigate the double taxation of corporate income that has already been taxed at a 35 percent rate. They argue that raising capital gains taxes will discourage investors which, in the business sector, will have a negative effect on job creation and the economy. Since capital is now more mobile, those who favor a lower capital gains tax rate maintain that raising rates in the United States will drive capital to places that are more attractive for capital investment.
- Against a Preferential Tax Rate for Capital Gains – Those against a preferential tax rate for capital gains say that double taxation is not as big an issue as some make it out to be. They argue that many companies don’t pay the maximum 35 percent tax rate. This group also makes the point that capital gains are earned on many assets such as real estate that are not subject to corporate taxation in the first place. They maintain that historically there has been no direct correlation between capital gains tax rates and the level of capital investment.
If you have questions about the implication of the current and projected income and capital gains tax rates for your specific financial situation, our experienced tax settlement professionals can provide you with the information you are looking for. We can help you make decisions about how to effectively allocate your financial resources for tax purposes. For more information about our tax debt resolution services or any other tax issue, visit us today at www.professionaltaxresolution.com. Contact us by phone at (877)-889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation.
