Traditionally, the United States has taxed long-term capital gains at a lower rate than ordinary income (wages, rent, and other compensation). The only exception was a brief three-year period after the Tax Reform Act of 1986 when Congress lowered the top ordinary tax rate from 50% to 28% and created temporary tax parity between ordinary and capital income. Long-term capital gain is currently taxed at a top rate of 20%. However, the rate will increase to 23.8% if the income is subject to a 3.8% tax on net investment income. The net tax investment income applies to real estate gains earned by passive investors and not the income earned from the active conduct of professionals in real estate.
Congress should continue to encourage investment and job creation with a meaningful capital gains incentive.
Maintaining a reduced rate on capital gains decreases the cost of capital, drives long-term investment, encourages productive entrepreneurial activity, draws investment from around the world, and increases U.S. workforce productivity and competitiveness.
We should be taking steps to encourage and reward risk-taking and investment in communities where it is needed, not punishing it.
President Biden’s Build Back Better agenda and his FY 2022 budget proposes to raise the capital gains rate to 39.6%, which brings it to parity with his proposed top rate on ordinary income. In addition, the President has proposed to extend the 3.8% tax on net investment income to the income of active business owners, including real estate professionals; the 3.8% tax applies to both capital gains and rental income.
Senate Finance Committee Chairman Ron Wyden (D-OR) has proposed a mark-to-market regime for capital assets in which built-in gain is taxed on an annual basis, regardless of whether the asset is sold.
The Build Back Better Act approved by the House Ways and Means Committee would have raised the capital gains rate from 20% to 25% and expanded the scope of the 3.8% net investment income tax, as proposed by the President. However, the version passed by the full House does not include an increase in the capital gains rate. The bill does include the expansion of the 3.8% income tax.
• Opportunity Zones, which were created just a few years ago, have mobilized $75 billion in new investment in low-income communities. Investors in Opportunity Zones should be rewarded for their critical investments with lower capital taxes.
• Our country’s great cities are facing significant challenges. Many cities have an aging infrastructure that can only be fixed with a sustained infusion of capital investment. Public spending alone is not going to get us there. It is going to require partnering with the private sector and private capital. Raising taxes on capital income will make it harder to attract the private investment needed to rebuild our urban centers.
• Risk capital differs in meaningful ways from wage compensation. The entrepreneur who foregoes a traditional job in favor of starting a business and building a capital asset forfeits many protections and benefits offered to employees, most importantly the certainty of a pre-negotiated salary. The capital gains preference partially compensates entrepreneurs for bearing risk and uncertainty, including the potential of a complete loss on the investment of their time and capital.
• Relative to our peers, the United States levies a heavy tax burden on capital income. According to the Tax Foundation, 30 of the 36 developed countries in the OECD have a lower maximum tax rate on individual capital gain than the United States.
• In the case of real estate, the reduced tax rate on capital gain partially offsets the higher risk associated with illiquid, capital-intensive projects. It also helps compensate for the economic effects of inflation.
August 27, 2021
Tax Proposals Under Scrutiny as Timetable Moves Up for Mammoth Reconciliation Bill
January 15, 2021
House Ways and Means Democrats Release Legislative Framework, Senate Finance Chairman Ron Wyden Will Pursue Capital Gains Changes
August 2, 2019
Republican Senators Urge Treasury to Index Capital Gains to Inflation
Senior Vice President & Counsel