Exposing the ‘Top 1%’ and Other Tax Myths : Capital gains: A bipartisan bill would cut rates for middle-income people who sell a house or small business.
Ever since the 1986 Tax Reform Act hiked capital gains taxes for most Americans, pundits and politicians have been debating how the federal government should tax people who save and invest. While many have expressed sincere concerns over who would benefit, a few members of the old class-warfare school have spread a number of myths about how capital gets created in this country and who benefits from its creation.
While the two of us have had our differences, we agree on what it takes to guarantee capital creation and thus job growth. Our Capital Formation Act embodies these beliefs. It provides a 50% exclusion from taxation on gains from capital assets, effectively lowering the top rate from 28% to 19.8%. Then, building on the President’s 1993 capital gains initiatives, it excludes an additional 25% of the long-term gains from investment in a qualified small business or allows the investor to roll over a gain from one qualified small business into another and defer the gain altogether. This approach dispels the myths that anti-growth opponents have used to cloud the issue.
The first myth is that capital gains needs to be a class issue, giving benefits to the wealthy while leaving the poor to hold the bag. Our bill explicitly provides the greatest tax rate reduction to lower- and middle-income taxpayers. These Americans, with taxable incomes less than $40,000 per year, will only have to pay a 7.5% tax on their capital gains. Single-digit tax rates would again be a reality for many Americans.
Of course, most capital gains are earned by Americans with higher incomes. The second myth we keep hearing is that the benefits of any capital gains relief will go to the “top 1%.” But these “high-income” Americans include anyone who realizes a gain on the sale of a home or small business. We have heard from countless middle-income constituents who are stunned to find that simply selling a home, farm or small business makes them, for one year, a part of the fabled “top 1%” the growth-o-phobes so often mention.
The third myth is that capital gains must necessarily be partisan. On this point, a little history: In 1992, 50 Democrats in the Senate and 209 in the House voted for a broad-based cut in capital gains taxation. Just as dramatically, the 1993 Democratic budget package provided a 50% capital gains exclusion for qualified small businesses.
When President Clinton’s 1993 capital gains tax cut clearly created opportunities for Americans of wealth, we heard no class-warfare outcry. Members on both sides of the aisle recognized that the way to create jobs is to create opportunity, and the way to create opportunity is to not tax it out of existence.
By building on pro-investment policies from both parties, combining broad-based capital gains relief for all Americans with a targeted exclusion for what House Speaker Newt Gingrich refers to as “baby businesses”--tomorrow’s high-growth firms--we are taking an important step toward the job-creating economy of the next century.
