A 2028 Position Paper on Capital Gains Taxes
Introduction:
Let’s be honest. Every election the Democrat/Republican candidate claims that the Republican/Democrat candidate is the gravest threat to the country ever. A credible case could be made that Trump and MAGA are existential threats but at least half of the country differs from this view.
Perhaps one way for a Democrat to win an election is for the party to evaluate its policies and come up with improvements, which could actually improve the world. Economic and Policy Insights has published several essay on potential improvements to economic proposals offered by the Democrat party.
The memo offered today evaluates the traditional Democratic Party position on the taxation of capital gains and proposes an alternative approach.
The Biden Administration position on Capital Gains Taxes:
President Biden’s 2025 budget envisioned substantial news revenue from higher capital gains tax rates. The proposal called for a near doubling of the capital gains tax rate, additional tax on capital gains tax rate through a higher tax on net investment income (a concept that includes capital gains) taxation of capital gains at death, and limits to 1031 exchange. The proposal are strongly supported by progressives in the party who want higher taxes on rich people.
However, an increase in capital gains tax rates would have a smaller impact on tax revenue and is less progressive than many people realize. Moreover, higher capital gains tax rates have adverse impacts on investment and housing.
Higher capital gains tax rates will discourage some people from selling assets, thereby, decreasing capital gains realizations and offsetting part of the expected gain from the higher tax rate. The loss of tax revenue from a reduced transaction level is considerable. The literature on the magnitude of long term and transitory changes in capital gains tax rates on realizations and revenues is complex. Go here for a sample.
Rich people are adept at avoiding taxes. They avoid paying capital gains taxes by borrowing at low interest rates. The heir avoids capital gains taxes when the basis of the asset increases at death.
People who take gains are wealthier than people with no assets, hence, poor people pay very little in capital gains. However, people are more likely to take gains when they need cash. It seems wrong to impose higher taxes on people who sell assets because of financial need.
Current law does exempt part of the gain on the sale of a principal residence $250 k/$500 k from capital gains taxes. However, the gain on the sale of the principal residence can be substantial, especially for older people who have resided in the house for a long time. Increasing the tax on gains on homes for people who must purchase a replacement home will decrease the number of homes on the market and depress real estate activity.
The Biden proposal for the taxation of gains at death could increase and speed up the realization of gains. However, the proposal would create financial volatility for a company stock and a household when a large holder of stock in a single company died.
The proposal for a $500 k cap on 1031 exchanges could reduce turnover of 1031 exchange properties. An alternative proposal for a low tax rate on future 1031 exchange transactions could raise more revenue than the proposed cap.
2028 XYZ Candidate:
The 2028 XYZ proposals on capital gains include lower not higher rates coupled with pragmatic proposals to expand capital gains realizations. Specific proposals include:
· A 25 percent decrease in the tax rate on capital gains rates on financial assets.
· A 50 percent reduction in the capital gains tax rate on the sale of private residences.
· Taxation of gains of 1031 exchanges at a 5.0 percent rate. New tax on 1031 exchange starts five years after enactment of the law.
· Modify rules governing basis on inherited assets but do NOT mandate taxation of unrealized gains at death. New inherited asset basis would be lower than current price but higher than the current basis applied to assets at death.
The lower capital gains tax rate on both financial assets and principal residences would increase capital gains realizations largely offsetting the loss of revenue from the lower tax rates.
The lower tax rate on gains from the sale of homes could substantially increase the volume of homes for sale and real estate activity. This change would encourage people to move for a new employment opportunity or allow older owners to move to a new living arrangement without financial penalty as their needs and health change when they age.
The taxation of 1031 exchanges at a low rate creates a new source of revenue.
The modified basis at death will increase eventual gains on inherited assets without subjecting heirs to an immediate tax bill that would likely destabilize stock prices for some companies.
Concluding thoughts: Many readers, especially progressives, will denigrate this post. They will argue that anyone who votes for Trump because of tax policy is a bad person, a “deplorable”.
Progressives also cheer higher tax rates on the rich even when the tax is avoided by the rich and imposed on people when they need cash. Progressives just want their policies to make an angry statement about inequality rather than solving the problem.
Republicans only want lower taxes and are taking a wrecking ball to our economy and the safety net to get it.
We need a new party.
Other Papers of Interest:
A third party policy agenda to make Americans financially secure again
https://bernsteinbook1958.substack.com/p/a-third-party-policy-agenda-to-make
A 2028 Student Debt Proposal
https://bernsteinbook1958.substack.com/p/a-2028-student-debt-proposal
The 2028 Health Care Transformation Act
https://bernsteinbook1958.substack.com/p/the-2028-health-care-transformation