Sunday, September 7, 2008

Where are the other 88 million? Republicans absurd claims about capital gains

Several weeks ago, in a Wall Street Journal op-ed piece, "For Obama, Taxes Are About Fairness" (William McGurn, August 19th), I came across a claim I've seen 100 times before: 100 million Americans would be affected by an increase in taxes on capital gains.
Who are these Americans? As an American who *does* benefit from low tax rates on capital gains, I've seen this inflated figure go unchallenged way too many times. Could it be true that 1/3 of all Americans are reporting capital gains on their 1040's? Most Americans that own stocks own them in IRAs and 401Ks, which aren't subject to these taxes. Is it possible that so many Americans own investments in taxable accounts?
Answer: NO.
From the tax data on the IRS website, in 2006, the IRS received 138,394,754 federal income tax returns. Of these, only 12,670,217 filers (9.2% of total) reported income from long-term capital gains. Fewer reported short term gains (5.3 million) or losses (5.2 million) . Clearly, some of the 12.7 million filers are heads-of-households. However, for the 12.7 million to aggregate to 100 million Americans, the average household size of capital gains earners would have to be 8 members - a very unlikely scenario.
Thus, either we're missing approximately 88 million Americans who have taxable capital gains OR, the 100 million figure is wildly inflated.
Why don't the democrats challenge this? Very few people are fortunate enough to have passive investment income. Every year, when I file the returns for my household, I'm struck anew by the absurdity of having my labor income taxed at twice the marginal rate of the passive income I earn from investments. I can only imagine how unfair our current tax policy must seem to the 125 million American tax filers who have only labor income and no capital gains!

2 comments:

Steve Roth said...

This is darned interesting, but I think you need to give stats on short-term and dividends for it to be convincing. I admit to being lazy and not digging it up myself...

susan feinberg said...

Steve, I put the new data in. I should mention that 31.6 million filers (22% of total) earn dividend income. (But the claim of 100 million Americans is often made about capital gains alone - see the Wall St. Journal article I reference).

Many dividend recipients are seniors, and a surprising number of these earn very little other income (12.5 million of the 31.6 million dividend income filers have a total AGI of less than $50K). Others are kids of rich parents who have put assets in their kids' names to lower their own tax burdens. Obama has proposed eliminating taxes for seniors earning under $50k, regardless of the source of income. This would certainly pick up a lot of the dividend income recipients with low adjusted gross incomes.