There is a rationale that says that capital gains rates should be low because people who reap dividends from stocks and bonds are partial owners in entities that already pay taxes. My thinking is that these gains are not all that much different from the dividends and interest that is paid on savings accounts and should be taxed as ordinary income. And looking at the chart above it looks like gazillionaires once paid higher tax rates on capital gains.
When you hear about the low taxes of people like Romney, what you need to know is that it wasn't always thus - and the days when the superrich paid much higher taxes weren't that long ago. Back in 1986, Ronald Reagan - yes, Ronald Reagan - signed a tax reform equalizing top rates on earned income and capital gains at 28 percent. The rate rose further, to more than 29 percent, during Bill Clinton's first term.
Low capital gains taxes date only from 1997, when Clinton struck a deal with Republicans in Congress in which he cut taxes on the rich in return for creation of the Children's Health Insurance Program. And today's ultralow rates - the lowest since the days of Herbert Hoover - date only from 2003, when former President George W. Bush rammed both a tax cut on capital gains and a tax cut on dividends through Congress.
Should Capital Gains Tax Rates be Higher?
The past few days have been rife with discussion of Mitt Romney's fourteen percent tax rate that he has paid on his investments. Paul Krugman speaks to this issue of why gazillionaires pay so little, percentage-wise, in an editorial titled "It's hard to justify low tax rates on the rich". Here are a few thoughts from it: