The Impact of Raising Tax Rates on Individual Capital Gains

Testimony submitted for the record for the hearing on “Tax Reform and the Tax Treatment of Capital Gains” Joint Hearing House Committee on Ways and Means and Senate Committee on Finance
Background

Even though the recession has been officially over since 2009, the U.S. economy continues to struggle with high unemployment and sluggish economic growth. Decision makers face major uncertainties, including the scheduled expiration of decade old tax reductions for families and individuals at all income levels, the so-called “Bush Tax Cuts.” One component of the expiring tax cuts is the individual capital gains tax rate. Without any action, the top individual capital gains tax rate will increase to 20% from the current top rate of 15%. As a result of the recently passed 2010 health care legislation, there will be an additional 3.8% tax on unearned income beginning in 2013. Coupled with the 2013 scheduled restoration of the “Pease Limitation” on itemized deductions (which will impose roughly a 1.2% marginal rate on capital gains), individuals will face a top federal rate on capital gains of 25%. This sharp 67% increase on investment income will no doubt have negative consequences on an already struggling U.S. economy. This testimony presents evidence on the impact of capital gains taxes on entrepreneurial activity, discusses how the U.S. tax rate compares to our trading partners and how letting the tax rate rise will impact the overall U.S. economy and job growth.

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