The capital gains tax could end up being the next focus when Congress reconvenes after the election. Many Congressional leaders have a dual goal of broadening the tax base while lowering overall tax rates.
Capital gains may become the scapegoat for cutting taxes in other places so the days of the 15% capital gains tax may indeed be over.
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Obviously, investors and advisors want the tax to stay at its current rate. But some who were in the industry during the tax reform of 1986 say that, if the individual tax rate gets lowered to 30% or below, the tax on investments will either have to meet that rate or come close to it.
It’s not possible politically to lower taxes across the board without having to also cut benefits, especially those that affect the middle class.
Based on that reality, some in Congress say that the focus needs to shift from tax rate targets to talking about trade-offs. Others say there are no binary choices in tax reform.
If the current tax laws are allowed to expire by the end of the year, the capital gains rate will increase to 20%. When the 3.8% Medicare tax kicks in, the effective rate will be higher. Still others want the rate to remain unchanged because the US capital gains rate is already at the top of global rankings in taxes on capital.
They feel increasing the tax will result in a disincentive to invest. The capital gains rate can effectively be a double tax on top of the corporate rate. The argument here is that a so-called integrated rate including all types of taxes effectively increases taxes to 45%.
Another argument is that raising the capital gains tax
will adversely affect fixed-income investors who are already struggling in a historically low interest rate environment.
All of this means the tax discussion will only become more heated as the fiscal cliff possibility comes more into focus. As the election comes closer, it’s likely we’ll hear much more about the discussion on taxes.