Will Tax Reform Dollars Come From Increased Rate On Capital Gains And Dividends?

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Written by Annette Nellen | Posted in Tax Policy

A 4/3/13 article in Politico, “Investment tax rate poses dilemma for the GOP,” raises the issue of whether lawmakers will increase the tax rate on capital gains and qualified dividends to help pay for tax reform that lowers the overall tax rates for individuals and corporations. They note that this could generate “gobs of money.” I think that is a good way to put it.

If you look at where funds could be generated to pay for lower tax rates in a revenue neutral tax reform bill, there are some obvious choices. These choices are the larger tax expenditures – exclusions such as for employer-provided health insurance, the mortgage interest deduction, and the lower rate on capital gains and dividends. For example, repeal of LIFO is estimated to generate about $7 billion per year. In contrast, a higher capital gains rate might generate $3 billion and a higher rate on dividends $7 billion. I’m estimating these amounts based on some figures in President Obama’s FY2013 Greenbook. He had also proposed capping itemized deductions and some exclusions at 28% which using 2001/2003 rates, would have generated $58 billion per year. And there is another factor to consider. Repeal of LIFO or slowing down depreciation are changes that are just timing. Over the long term, they really don’t generate revenue. However, raising the rate on capital gains and dividends and capping the benefit of deductions and exclusions are permanent dollars.

I think Congress will have to look at revenue that can be generated from individual tax changes to help pay for a corporate rate reduction. Some of that change should also help fund a lower individual tax rate.

What do you think?

Original post at 21st Century Taxation blog. Connect with me at: Annette Nellen on TaxConnections.

Annette Nellen

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.