Lower the Top Tax Rate on Capital Gains and Dividends to 15 Percent

Long-term capital gains and qualified dividends face different brackets and rates than ordinary income, in part to offset some of the double taxation of saving and investment that occurs under the income tax system.

This option lowers the top rate on capital gains and qualified dividends from 20 percent to 15 percent. A lower top capital gains tax rate would reduce marginal tax rates on saving, increasing after-tax returns and boosting the incentive to save. Domestic saving would rise, and more of the returns to American investment would flow to Americans. At the same time, the larger budget deficit would increase federal government borrowing, and more interest payments would flow to foreigners. These two offsetting effects result in a slight rise in GNP.

On a conventional basis, this option would increase the primary deficit by $170.7 billion over the budget window. Long-run GDP would be unchanged, while long-run GNP would rise by less than 0.05 percent. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be higher than baseline, reaching 177.5 percent by 2056.

The benefits of a lower top capital gains tax rate are concentrated among high-income taxpayers. The top quintile of taxpayers would experience a 0.2 percent increase in 2036, while other groups would experience no change.