When President Obama takes the stage to deliver his sixth State of the Union address tonight, you can expect to hear an awful lot about the tax reform agenda he's laid out over the past few days. His proposal to raise the top capital gains tax rate from 23.8 percent to 28 percent is generating a fair amount of attention — as my colleague Matt O'Brien put it on Friday, "money you get from investments is taxed less than money you get from, you know, actually working, and while that might be good for the economy, it's not good for a basic sense of fairness."
Congressional Republicans have been quick to paint this as a devious scheme to redistribute wealth from America's makers to its takers — an assault on America's "small businesses, savers and investors," as Senator Orrin Hatch (R-Utah) called it. Is it really, though? Who actually pays capital gains taxes anyway?
In 2012, only about 16 percent of American tax filers reported any capital gains at all, according to data from the IRS. So the universe of people potentially affected by the capital gains hike is already pretty small. If we were to map capital gains returns as a share of all tax returns filed, it would look like this:
As you might expect, there's a concentration of capital gains filers along the coasts, and within the I-95 corridor in the Northeast. But the middle of the country — Montana, the Dakotas, Nebraska — stands out even more. Among the 10 counties with the highest share of capital gains filers, only one — Marin County, Calif. — is not in this region.
Oil money is probably a big factor here. Agriculture, too, as sales of land are also subject to the capital gains tax. Garfield County, Mont., has the highest share of filers reporting capital gains, at 45 percent. On the other hand, parts of the Deep South, Texas's Rio Grande Valley, and Appalachia all see the lowest percentages of tax filers reporting capital gains.
Judging solely by the map above, you might be tempted to take Orrin Hatch at his word — a capital gains tax hike looks like an assault on America's hardworking heartland! But here's the important thing: Obama's proposed tax hike would only affect the top income bracket — those making over $465,000 a year.
Going back to the IRS data, the average amount of capital gains in Garfield County was a whopping ... $3,277. The average capital gains in most of those top 10 counties doesn't even crack $10,000. In other words, Obama's planned rate hike will only affect a minority of capital gains filers, who are themselves a minority of taxpayers overall.
We can get a better sense of where the affected live if we look only at top-income earners. Below, I've mapped the share of taxpayers in each county who report capital gains and who have an adjusted gross income (AGI) of greater than $200,000, the highest level the IRS provides county-level data for.
Note that the color scale tops out at 4+ percent in this map, instead of 20+ percent in the previous one. The heartland stands out much less here, although western North Dakota and Nebraska counties still have high percentages of these wealthy capital gains filers.
This map is more representative of where the nation's 1 percent live. Falls Church, Va., has the highest share of wealthy capital gains filers, at 17 percent. Marin County, Calif.; McMullen and Glasscock counties in Texas, and New York City round out the top five.
Still, this is only an approximation of where the affected taxpayers might live — this map includes all tax filers making $200,000 or more, while the Obama capital gains hike would only affect those making more than $465,000. In total, according to the IRS, 17,636 filers with an income of $500,000 or more reported capital gains in 2011. In other words, Obama's capital gains proposal would only affect the 1 percent, and most of those are in the top 0.1 percent. This makes sense when you consider that the top 400 households in the U.S. — the 0.000333% — captured more than 16 percent of all capital gains in 2010.
So is it an assault on America's savers, small business and investors, as Orrin Hatch claims? Hardly. Of course, this discussion is largely academic: Obama's proposals have little chance of passing the Republican-controlled Congress.