A Project of The Annenberg Public Policy Center

Impact of Capital Gains Tax on the Middle Class


Q: Would raising the capital gains tax rate hit the middle class?

A: More than 80 percent of all capital gains income went to those making more than $200,000 a year in 2006. Very few making under $50,000 would be affected by any increase in the top capital gains rate.

FULL QUESTION

On the Sunday shows of April 20 I heard two quotes about how many and which taxpayers would be affected by Sen. Obama’s proposed increase in the capital gains tax rate. …

On "Fox News Sunday," during an interview with Sens. Dick Durbin and Charles Schumer, I believe that Chris Wallace said that half of the tax returns with capital gains reported income under $50,000 a year.

Did I hear these correctly? What is the real answer or where could I find it?

FULL ANSWER

"Fox News Sunday" host Chris Wallace suggested that Sen. Barack Obama’s proposal to raise the rate would be a "substantial" tax increase on the "middle class."

Wallace, April 20: [When] half the tax returns reporting capital gains come from households making less than $50,000, why isn’t that a considerable, substantial, middle class tax increase?

Wallace was wrong on a number of counts. The fact is that Obama’s proposal exempts all making under $250,000 a year from paying any increase in the capital gains rate, according to campaign economic adviser Austan Goolsbee. And even if it didn’t, the suggestion that it would be a "substantial" hit on those making under $50,000 a year is false. Wallace’s figure for those who have capital gains and make less than $50,000 a year was way off the mark, for one thing. And besides, very few of them pay the top capital gains rate that Obama proposes to increase for the over-$250,000 set.

Let’s get the numbers straight. It’s true that millions of taxpayers who make less than $50,000 a year show some capital gains income on their returns. However, the most recent figures from the Internal Revenue Service’s "Statistics of Income" series show the following:

Just under 13 percent of all who filed tax returns for 2006 reported any capital gains income, however small. That means that raising capital gains tax rates could not affect 87 percent of all filers, since they have no gains income to tax. (Capital gains are the profits realized from the sale of such assets as stocks or real estate.)

Wallace was referring to that small slice of returns that show any gains at all. But of those returns that had capital gains income, less than 36 percent showed adjusted gross income of less than $50,000, not "half" as Wallace said.

To get a better idea of who would pay the most if capital gains rates went up, look at who gets the most capital gains income. More than eight dollars of every 10 in capital gains goes to those making more than $200,000 a year.

Those are the tax filers who, overwhelmingly, would be affected by any increase in the rates, even if there were no exemptions such as Obama proposes.

The group Wallace mentioned, those who make less than $50,000, got only 4 percent of all capital gains income in 2006. And hardly any of those pay the top rate now. All married couples and many, perhaps most, singles in that category pay only a 5 percent rate on any capital gains they might receive, not the top rate of 15 percent. (All rates given here apply to long-term capital gains, on assets held for at least a year before being sold.)

Under current law, the 5 percent capital gains rate applies to those who fall into the two lowest income tax brackets. In 2006, for married couples filing jointly, that included all making up to $61,300. For singles the cut-off was $30,650. The brackets are adjusted upward each year for inflation, and married couples can make up to $65,100 in 2008 before they would be affected by an increase in the top capital gains rate. For singles, the cut-off comes at $32,550.

Obama has indicated he would accept a top rate of 28 percent, saying in an interview on CNBC that he "would not go above what existed under Bill Clinton, which was the 28 percent. I would – and my guess would be it would be significantly lower than that." Hillary Clinton said during the April 16 ABC News Democratic debate in Philadelphia that she wouldn’t raise the rate above 20 percent "if I raised it at all." That’s the level to which the top capital gains rate was reduced in 1997, midway through her husband’s administration.

On the Republican side, John McCain’s Web site says he’ll maintain the current capital gains tax rate.

-Brooks Jackson and Viveca Novak

Sources

Transcript: "Sens. Durbin, Schumer on ‘FOX News Sunday’" FoxNews.com, 21 April 2008.