facts and nonpartisan perspectives on the issues

IN THIS ISSUE

Capital Gains Tax

The run-up to the Pennsylvania primary raised many questions about capital gains and the effects tax-rate changes have on revenues.

Senator Obama said he would consider raising capital gains taxes, but not beyond the 28 percent rate on long-term gains that existed under President Bill Clinton. Senator Clinton said she wouldn't raise the rate above 20 percent. Senator McCain, the presumptive Republican nominee, wants to leave the top rate where it is, at 15 percent. But how significant are these differences? And how will raising or lowering the tax rate affect middle-class Americans?

Experts from the Urban-Brookings Tax Policy Center (TPC) can provide facts and nonpartisan perspectives to address these questions. Read more in the reports linked below and listen to TPC Director Leonard Burman’s “Sound Policy” interview on the right.

KEY FACTS

• Capital gains are profits from the sale of a capital asset, such as corporate stock, a business, or a home. Capital gains are generally included in taxable income, but are often taxed at a lower rate than income.
• Taxpayers may realize up to $250,000 of gains on their home tax free. Married taxpayers filing jointly may exclude up to $500,000 from tax.
• Most long-term capital gains (on assets held for a year or more) are taxed at a 5 percent rate for taxpayers in the 10 and 15 percent tax brackets and at a 15 percent rate for those in higher brackets.
• Short-term gains (on assets held for less than a year) are taxed as ordinary income.
• In 2005, 47 percent of all tax returns reporting capital gains were from households with incomes below $75,000. However, those households accounted for only 5 percent of the total capital gains reported.
• Reduced tax rates on capital gains favor the wealthy. In 2007, an estimated 92 percent of the benefit of low rates went to taxpayers with incomes greater than $200,000, and 72 percent to those earning more than $1 million.
• In 2008, the top income tax rate is 35 percent, applicable to people with taxable income above $357,700 ($178,850 for married couples filing separately). Those taxpayers face a tax rate on long-term capital gains of only 15 percent, 20 percentage points below their regular tax rate.
• Low rates on capital gains encourage tax shelters that convert ordinary income to capital gains. For top-bracket taxpayers, tax sheltering can save 20 cents per dollar of income sheltered.

Additional analysis is available in UI reports:

• Tax Policy Briefing Book: How Are Capital Gains Taxed?—TPC staff
• Tax Policy Briefing Book: What Is the Effect of a Lower Tax Rate?—TPC staff
• Read Their Lips: Clinton and Obama Take the Pledge—Howard Gleckman
• The Labyrinth of Capital Gains Tax Policy: A Guide for the Perplexed—Leonard Burman

Decision Points '08 is published weekly by the Urban Institute, a nonpartisan social and economic research organization.
subscribe to the Decision Points e-mail newsletter