Raise the Tax Rates on Long-Term Capital Gains and Dividends by 2 Percentage Points

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of dollars 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2015-2019 2015-2024
Change in Revenues 1.3 4.9 5.1 5.3 5.5 5.8 5.9 6.2 6.4 6.6 22.1 52.9

Source: Staff of the Joint Committee on Taxation.

Note: This option would take effect in January 2015. Estimates are relative to CBO’s April 2014 baseline projections.

When individuals sell an asset for more than the price at which they obtained it, they generally realize a capital gain that is subject to taxation. Long-term gains (those realized on assets held for more than a year) and qualified dividends (generally paid by domestic corporations or certain foreign corporations) are taxed at lower rates than taxpayers’ ordinary income—that is, income from other sources, such as wages, interest, and nonqualified dividends.

This option would raise the basic tax rates on long-term capital gains and qualified dividends by 2 percentage points. Those basic rates would then be 2 percent for taxpayers in the 10 percent and 15 percent brackets for ordinary income, 17 percent for taxpayers in the brackets ranging from 25 percent through 35 percent, and 22 percent for taxpayers in the top bracket. The option would not change the other provisions of the tax code that also affect taxes on capital gains and dividends.