Ending All Tax Preferences For Investment Income Would Be A Huge Change

I hope to stop writing about this subject some day soon, but it seems to me that reading other progressive commentary on the subject of tax preferences for investment income that lots of people are understating what it would really take to equalize the treatment of labor income and investment income. The fact that the top capital gains tax rate is lower than the top ordinary income tax rate is only a small piece of the puzzle. There’s also the not-insignificant fact that investment income (whether from capital gains, rents, or dividends) isn’t subjected to payroll taxes for Social Security.

Your IRA, 401(k), or old-school defined benefit pension also got preferred status under the tax code. And last but by no means least, capital gains on owner-occupied housing are largely non-taxed.

For a typical person, an owner-occupied house and various tax preferred retirement accounts constitute the overwhelming majority of household assets. What’s more, residential investment is something like a third of overall private investment in the economy most of the time. This is one of the reasons that additional cuts in the capital gains tax rate relative to the status quo would be very regressive. Middle class families aren’t really paying capital gains tax even if they have some non-trivial investment gains. And that regressivity is a pretty good reason to be skeptical of new cuts in the taxation of investment income. But the flipside is that if you’re genuinely persuaded that there’s no good case for tax-preferences for savings, you should be supporting an agenda that’s much bolder than an increase in the marginal capital gains tax rate. You need to talk about FICA, about owner-occupied houses, about IRAs, and all this other stuff.