Monday, December 21, 2009
The income tax brackets, with rates up to 35%, attempt to adjust the tax rate to the standard of living that the income supports. Capital gains get a 15% tax rate on the assumption that the gain will not be consumed but will be reinvested. In an efficient market, however, it is not appropriate to presume that sales are made for reinvestment, once relative prices adjust to known information. As a condition for the lower capital gains tax rates, the proposal would mandate reinvestment into an account not available for consumption. Later distributions of capital gains from the account would be treated as ordinary income, but with a credit for capital gains tax previously paid. Corporate stock would not be affected because the lower shareholder tax is a relief from double taxation. The proposal would also reduce the spread between capital gain and ordinary income to no more than 10% of gain because the global glut of capital means that not much preference needs to be given to old capital.
The proposal is made as a part of the Shelf Project, which is a collaboration among tax professionals to develop and perfect proposals to help Congress raise revenue. The current deficit, now at $1.6 trillion or 11.2 percent of GDP, cannot be sustained. In the impending revenue crisis, base-protecting revenue provisions that were not possible under ordinary politics become political necessities. Shelf projects defend the tax base and improve the rationality and efficiency of the tax system. Shelf Project proposals are intended to raise revenue without raising rates because the best tax systems have the broadest possible base to reach the lowest feasible tax rates. A longer description of the Shelf Project is found at The Shelf Project: Revenue- Raising Projects That Defend the Tax Base, 117 Tax Notes 1082 (Dec. 10, 2007).