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:
The main reason the rich pay so little is that most of their income takes the form of capital gains, which are taxed at a maximum rate of 15 percent, far below the maximum on wages and salaries. So the question is whether capital gains - three-quarters of which go to the top 1 percent of the income distribution - warrant such special treatment.
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.
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.


  1. The last 30 years have convinced me that lower tax rates for the rich only further swell their savings accounts. Labor costs (and unions) are being attacked on multiple fronts. Entitlements are accused of bankrupting the country. Military spending and corporate subsidies are protected at all cost if not increased. More people blame the middle class for over-extending the banks until they failed than Wall Street.

    1. Thanks Joe. The low tax rate on capital gains speaks to the influence of money on federal legislation.

  2. Replies
    1. How high do you think the fat cats in Congress would be willing to raise it? Especially when you consider that many of them engage in insider trading.

    2. Exactly, Bob, they are being asked to tax themselves so will they choose what's best for the country or their own bank accounts? It seems very unfair to me that the rich are taxed less, it should be the other way around.


I love to get comments and usually respond. So come back to see my reply. You can click here to see my comment policy.