3/31/2023 0 Comments Preferential treatment10 The Tax Reform Act of 1986 increased the highest rate on capital gains from 20 percent to the ordinary income rate. income tax history when the statute provided for capital gains to be taxed at the same rate as ordinary income was for the brief period after Republican Senator Bob Packwood, chair of the Senate Finance Committee, and Democratic Representative Dan Rostenkowski, chair of the House Ways and Means Committee, joined to become a dynamic tax-writing team pushing through the most significant tax reform bill in history. 8 In contrast, Republican lawmakers have steadfastly resisted the idea of raising capital gains rates in fact, former President Donald Trump floated the idea of further reducing the top capital gains rate to 15 percent. All three of the 2020 democratic presidential front-runners-then former-Vice President Biden, Senator Elizabeth Warren, and Senator Bernie Sanders-campaigned on taxing capital gains as ordinary income to certain wealthy taxpayers. 7 The capital gains rate increase was ultimately withdrawn from the bill as passed in the House, however, and is unlikely to be added back if and when the Senate passes the bill.Įliminating the capital gains preference has been politically popular among Democrats and progressives for some time. That rate fell well short of President Biden’s previous ambitious goal to tax capital gains at the maximum ordinary income rate of 39.6 percent for wealthy taxpayers earning more than $1 million annually. 6 The House reconciliation bill prior to passage included an increase in the top tax rate on long-term capital gains to 25 percent. 4 To pay for these social programs, the House reconciliation bill originally proposed higher taxes, tax enforcement, 5 and other major tax law changes, such as further limitations on section 1031 like-kind exchanges and carried interest, introduction of graduated corporate rates, a country-by-country application of the global intangible low-taxed income (GILTI) rules, and limitations on the 20 percent deduction under section 199A. 3 Known to be the centerpiece of President Biden’s domestic agenda, the initial $3.5 trillion reconciliation package included a paid-family leave program, free universal preschool services, an extended child tax credit, and renewable energy tax breaks, among others. Senator Joe Manchin’s recent “stuck on coal” positions against various provisions in the bill, including its support for renewable energy sources. In late fall 2021, the Build Back Better Act 2 was considered under congressional budget reconciliation rules which would allow the bill to pass in the Senate with a simple majority, though that majority is in serious question given W.Va. The Build Back Better Act and the Tax Reform Act of 1986 Part III explores the policy arguments, repeated throughout the 100-year period, for and against the capital gains tax preference. Part II provides historical background on the origins of the capital gains preference. Part I provides the general contours of the Build Back Better Act as proposed by President Biden and the significance of President Biden’s capital gains proposals as compared to those in the Tax Reform Act of 1986 (the 1986 Act), under which capital gains and ordinary income were subject to the same rate for the first time in the U.S. This article addresses notable aspects of the 100-year-old history and policy debate about the preferential treatment of capital gains. 1 While the federal tax code has undergone numerous reforms, however, the capital gains preference has weathered the shifting political winds with remarkable durability, perhaps reflecting the fact that it is most readily available to the nation’s wealthiest and most powerful individuals. The capital gains rate increase has been one of the most scrutinized tax proposals in President Biden’s Build Back Better plan, which has been continuously slimmed down in ongoing negotiations from the initial $3.5 trillion price tag over a decade (which, though high, is far less than would be the ten-year cost of the annual military budget just passed by the House and Senate). Just four years after the enactment of the 2017 Tax Cuts and Job Act, the federal tax system may be on the cusp of yet another major overhaul. In recent years, no single tax issue has been as contentious and divisive as the capital gains preference. This year marks the 100th year since the Revenue Act of 1921 introduced the first preferential rate for capital gains into the U.S.
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