Saving the Farm or Giving Away the Farm: A Critical Analysis of the Capital Gains Tax Preferences
Abstract
Tax policies that have shaped our tax structure and economic climate overwhelmingly favor the wealthy, propertied taxpayers. These tax policies are currently configured to shift wealth and the benefits of wealth in one direction: To the wealthier taxpayers. As such, these policies contribute to the wealth and income inequality that disadvantages the poor and middle class in favor of the wealthy.
Over the years, the topic of capital gains preferences has been the fodder for much debate regarding the best way to deal with capital gains taxes. Discussions have fluctuated between raising, reducing, and repealing capital gains taxes. Other discussions have centered on whether capital gains have an effect on the economy, and if so, how the research supports those assertions. It would be difficult to cover all aspects of the issues associated with capital gains taxes in one article; therefore, this discussion will focus on preferential rates on capital gains as applied to individual income taxes.
Tax policies, when viewed in the aggregate, reveal that the capital gains tax has been a mechanism to shift wealth to the wealthiest taxpayers. This shift is evident through tax preferences and subsidization to reduce or eliminate tax burdens for the wealthy. This Article will add to the discourse by examining how capital gains preferences have failed to accomplish the initial goals of Congress-to encourage disposition of capital property and to generate revenue.
While there is existing literature on wealth and income inequality, and there are discussions of multiple causes of wealth and income inequality, this Article is unique in that it will explore the failures of various historical justifications for the capital gains tax preferences and how these preferences contribute to wealth and income equality.
This Article addresses some of the inequities and offers a multi-faceted proposal to raise revenue and incentivize preferences for a more balanced approached to tax policy. First, I advance a proposal that offers solutions to shift certain aspects of the capital gains tax preferences toward the middle and lower class. To balance the costs, I then propose an option to phase out or eliminate other preferences that primarily benefit the wealthiest taxpayers. This balanced approach will allow the government to raise revenue and change the capital gains tax preferences from a rewards to an incentive-based system.