Raise the Top Tax Rate on Capital Gains and Dividends to 30 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 raises the top rate on capital gains and qualified dividends from 20 percent to 30 percent. A higher top tax rate on capital gains would increase marginal tax rates on saving, reducing after-tax returns to saving and decreasing the incentive to save. Domestic saving would fall, and foreign investment into the US would increase, preventing a decline in output but causing more of the returns to American investment to flow to foreigners. The smaller budget deficit, however, would reduce federal government borrowing and interest payments to foreigners. These two effects largely offset, resulting in a slight decline in GNP.

A higher capital gains tax rate would also discourage capital gains realizations, leading to little revenue generated in the first few years of the budget window. On a conventional basis, this option would decrease the primary deficit by $362.5 billion over the budget window. Long-run GDP would be unchanged, while long-run GNP would decline by less than 0.05 percent. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 172.8 percent by 2056.

Raising the top tax rate on capital gains affects high-income taxpayers. In 2036, the top quintile of taxpayers would experience a 0.3 percent decrease in after-tax income.