It is the wealthy who earn most capital gains, and it is normally the wealthy who benefit from cutting tax rates on such gains. But President Clinton on Monday came up with a unique capital gains proposal - one that would cut capital gains taxes significantly for everyone but the richest taxpayers. It might even raise taxes on some relatively wealthy people.
Under current law, the maximum rate on capital gains - profits from the sale of stocks and other assets held more than a year - is 28 percent. Under Clinton’s proposal, the maximum rate would fall only a tiny amount to 27.72 percent.
The proposals adopted in both the House and Senate would cut the capital gains rate to 10 percent for those in the 15 percent ordinary bracket - a group that has few if any capital gains to report.
For all others, the rate would be 20 percent.
The administration proposals take a different approach. They provide that 30 percent of long-term capital gains would be excluded from taxes. For most taxpayers, that means that they would pay an effective rate of 70 percent of their ordinary tax rate - 19.6 percent for taxpayers in the 28 percent bracket and 27.22 percent for taxpayers in the 39.6 percent bracket.
For high-income taxpayers - and that would include anyone with a very large capital gain - the savings will be small. An investor in the top bracket who has a $100,000 capital gain would save $280 in capital gains taxes compared to current law. By comparison, he would save $8,000 under the congressional proposals.
A further catch under Clinton’s plan comes from the way the tax is computed. A taxpayer with a large capital gain would report the entire gain, then deduct 30 percent of it and pay the full tax rate on the remainder. The White House proposals, however, require that 30 percent to be added back in to taxable income when calculating it under the so-called alternative minimum tax.
Unknown to most taxpayers, but crucial to a comparative handful - fewer than a million - the alternative minimum tax operates as a second tax code. It was designed to prevent certain people from largely escaping income taxes. It taxes income at no more than 28 percent but includes as income many things that most people can deduct.
A taxpayer already subject to the alternative minimum tax would not benefit from the Clinton proposal on capital gains but also would not suffer. And a taxpayer in the top 39.6 percent bracket who was forced into the alternative minimum tax would probably not suffer.
But some taxpayers with somewhat lower incomes, most likely those in the 31 percent and 36 percent brackets, but also including some in the 28 percent bracket, might be moved into the alternative minimum tax and wind up owing more taxes than they would have paid if the capital gains tax had not been cut.