- On Monday, The New York Times reported that President Donald Trump was considering a plan to change the way capital gains taxes are calculated.
- It’s widely expected that the benefits from this change will mostly go the wealthiest Americans.
- There’s a very simple reason why the top 1% stands to benefit from lower capital gains taxes: They earn the lion’s share of capital gains.
On Monday, The New York Times reported that President Donald Trump was considering a plan to change the way capital gains taxes are calculated by factoring inflation into the appreciation of capital assets.
The estimated $US100 billion tax cut that would result from the change was widely predicted to mostly go to the wealthiest Americans, and there’s a very simple reason why: The top 1% earn the lion’s share of capital gains.
Capital gains taxes apply when a person sells an asset, like stock in a corporation or a piece of real estate, at a higher price than when they initially bought it. For capital assets held shorter than a year, normal income taxes apply, and gains from selling assets held longer than a year are taxed at a lower rate.
Since capital gains come directly from sales of accumulated assets, it follows that those who get a large part of their income directly from their wealth will see the most benefits from a reduction in taxes on that income.
According to the Tax Policy Center, the top 1% of the income distribution received about 69% of all realised long-term capital gains in 2017:
And that skew in the distribution of capital gains income comes from the high level of wealth inequality in America. According to a 2017 study cited by The Washington Post, the top 1% wealthiest Americans own about 40% of the country’s wealth.
The proposed change to the law effectively lowers capital gains taxes by adjusting the initial purchase price of assets for inflation. Under the current law, if someone bought $US1 million in stock ten years ago and then sold it for $US1.5 million today, the $US500,000 profit made on that sale would be subject to capital gains taxes.
Under the new proposal, the $US1 million purchase price would be adjusted for inflation, giving an approximate inflation-adjusted purchase price of about $US1,145,000. The taxable income under the new proposal would be then be the difference between the $US1.5 million sale price and that adjusted purchase price, or about $US355,000 instead of the original $US500,000. That reduction in taxable income then would correspond to lower capital gains taxes paid on the sale.
An independent study of this type of change from the Wharton-Penn Budget Model suggests that most of the benefits of this change would be among the very well-off, with the top 1% of the income distribution receiving about 86% of the estimated $US100 billion in total tax reduction:
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