Tax Policy, Fairness & The Economy - Part 7

The previous report covered a summary of Federal Spending and a proposal to limit Federal Spending to a budget equating to 18% of National GDP.

This post is a continuation of the discussion on Federal Revenue.         

Here is a Summary of Federal Revenue by Source:

 Year 2022 ($ Billion)            Income Reported          Total Tax Paid            Percent of Total

Payroll Taxes                       1,500          31%

Personal                                     14,100                          2,250                           46%          

Capital Gains                              1,700                             350                              7%

Corporate                                   13,500                             425                             9%

Other Income/Fees                                                            375                              7%

TOTAL                                       29,300                           4,900                                     

Observations:

Payroll Taxes 

Primarily fund Social Security and Medicare.  It is a fixed cost currently embedded in Social Benefits.  It is a Major Issue in need of reform. The issue is so big that Cogport will address it in the future as a separate topic. 

Personal Taxes 

The largest source of Source of Federal Revenue. 

As Tax Policy has worked out with changes over the years, the annual amount of Personal Tax paid consistently totals about 13% of all Personal Income reported. 

The only change has been a shift to more of the total being paid by higher income earners.

For now, Cogport considers the Personal Income Tax Policy as fair and stable. It should be maintained in place for future planning.

Capital Gains 

Capital Gains are income from profits on the sale of investments, real estate, stocks, and other assets.  The Tax Policy has been debated and revised significantly over time. 

(Note that Corporations do not pay Capital Gains tax rates – their asset gains are taxed at regular income rates.)

Over the years, Capital Gains Policy has varied by Tax Bracket and complicated rule changes.

Here is a Simplified History for Perspective on Long-Term Capital Gains Rates:

Year                    Top Rate

2000                    20%

2003                   15%

2013                   15 - 20% Plus added 3.8% NIIT for high incomes.

The fundamental question is why Capital Gains are treated differently from Personal Income.

Capital gains are treated differently from personal income for several reasons, primarily rooted in economic, policy, and fairness considerations.

Here are the key reasons why capital gains have received favorable tax treatment:

• Encourage Long Term Investment – Good for the Economy.

• Mitigate the effect of inflation on Gains over time.

• Encourage entrepreneurship by offering lower taxes on the sale of businesses or investments in startups.

• Compensate for risk taking in capital assets like stocks or real estate.

As it turns out, Capital Gains policy is a primary concession to high and ultra income earners. 

When fairness is considered, those who achieve the highest wealth acquired it from Capital Gains in their investments in Stocks and Business Ownership.

Warren Buffett, one of the world’s richest persons, has called it out as a Policy that benefits the Wealthy.

Cogport supports the premise that Capital Gains Policy should conserve incentive for long term investment stability and encourage entrepreneurs in new business. 

However, there comes a point where the incentive becomes unfair.

Cogport proposes a Capital Gains Tax Reform based on the following:

Increase the number of brackets and make Capital Gains Tax more Progressive.

Here is a Proposed Program:

Capital Gains Brackets                                           Tax Rate

Up to $ 9,999                                                                     8%

$ 10,000 - $ 24,999                                                         10%

$ 25,000 - $ 49,999                                                         12%

$ 50,000 - $ 99,999                                                         16%

$ 100,000 - $ 249,999                                                     20%

$ 250,000 - $ 999,999                                                     22%

$ 1,000,000 and Over                                                     28%

How this would affect Federal Revenue:

The current overall effective rate on Capital Gains is about 18%.

The proposed effective rate on Total Gains in all Brackets is about 26%.

With Projected Capital Gains in 2024, this Proposal would increase Federal Revenue by about $ 210 Billion.

Advantages:

• Significant Reduction in Federal Deficit.

• Creates Fairness in the Tax System because it eliminates most of the advantage previously targeted to the Wealthy.

• Preserves incentive for Long Term Investment.

Summary

The next post will cover Corporate Taxes.

A following final post in this Series will pull together the Cogport proposals into a combined presentation outlining the Total Impact on Federal Spending and Revenue.

David Hollaender                            October 17, 2024

Cogport.com