President Obama and leading Democrats want to allow the tax cuts passed under Bush to expire. That would raise the capital gains tax rate from 15 percent to 20 percent. But that would still be lower than the rate under President Ronald Reagan — who raised the tax in 1986.
“Capital gains . . . veers onto theology for Republicans, but it has always been a bipartisan issue,” Bloomfield said.
A look at capital gains taxes.
Series: Breakaway Wealth
A poll this spring by the nonprofit Public Religion Research Institute showed that Americans, by a 2-to-1 margin, think the wealthy should pay more taxes than the middle class and the poor.
Billionaire Warren Buffett has become one of the loudest and most frequently cited proponents of the wealthy paying more in taxes.
“The truth is, I have never had it so good in terms of taxes,” Buffett said in an interview with Charlie Rose. “I am paying the lowest tax rate that I’ve ever paid in my life. Now that’s crazy, you know. And if you look at Forbes 400, they are paying a lower rate, counting payroll taxes, than their secretary or whomever around their office, on average.”
How the wealthiest Americans managed to get Congress to treat money made from investments differently from salaries or wages involved a variety of lobbyists, economists and lawmakers.
“Capital gains is economics, theology and politics wrapped together,” Bloomfield said.
The Greenspan effect
The theory justifying low capital gains taxes has many philosophical fathers but none as influential as Alan Greenspan, the former Federal Reserve chairman who was treated as an economic seer for decades.
Greenspan said capital gains taxes made people reluctant to move out of one investment and into other, more-promising ones.
In 1997 congressional testimony, Greenspan said the “major impact” of the capital gains tax, “as best I can judge, is to impede entrepreneurial activity and capital formation.”
“The appropriate capital gains tax rate was zero,” he added.
Greenspan’s thinking had been around for decades. The same approach was adopted in 1921, just before a stock market boom, when the U.S. government lowered the capital gains rate for the first time. Over the decades, the rate fluctuated but remained lower than the rate on wage income.
Then in 1986, under a far-reaching tax bill, Democrats cut a deal with Reagan to raise the tax on investments and lower the one for salaries. For the first time in 65 years, both forms of income would be taxed at the same rate: 28 percent.
But that moment was brief.
In 1990 and 1993, the top tax rates on other forms of income rose, while the tax on capital gains stayed put, a disappointment to President George H.W. Bush, who wanted even lower capital gains rates.
After the Republicans took control of Congress in 1994, they again pressed for capital gains rate cuts.
Greenspan was then near the peak of his credibility in Washington. In 1993, he promised Clinton that he would lower interest rates if Clinton backed a deal to narrow the budget deficit. Both men delivered, building trust.
By 1997, the GOP leaders were turning to Greenspan for economic cover and inspiration.
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