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![handle is hein.taxfoundation/iretcgadv0061 and id is 1 raw text is: IRET
Advisory+
July 21, 1997 No. 64
CAPITAL GAINS, INDEXING, AND
THE AMT
The House and Senate are now in conference to
iron out the differences in their respective tax bills,
and some accommodation will have to be made with
the President on the
outstanding issues. What
features of the capital gains
and alternative minimum tax
(AMT) provisions are the most
critical to keep?
The House and Senate
versions of the tax bill would
impose a cap on the tax rate
on capital gains of 20% (10%
for taxpayers in the 15%
bracket). The House bill
would also index the basis of
stock and tangible business
property for future inflation,
post 2000. The President
opposes indexing, and favors a
The President
andfavors a
30% exclusion of
capital gains from taxable income, resulting in a top
rate of 27.72%, or virtually no reduction from the
current 28% cap for upper income taxpayers.
The Congressional proposals would extend the
capital gains rate reduction to taxpayers affected by
the alternative minimum tax. The President's
proposal would probably regard the 30% exclusion
as a preference item under the AMT, imposing a
Institute for
Research on the
Economics of
Taxation
26% or 28% AMT rate on capital gains of affected
taxpayers, which would be little or no tax relief.
The House version of the tax bill would reduce
the number of corporations subject to the AMT, and
reduce its burden, by substituting normal income tax
depreciation for the far less generous depreciation
currently allowed under the AMT. The bill would
also provide a modest expansion of the AMT
exemption for small corporations and individuals.
The Senate has a less generous AMT exemption
increase and no AMT depreciation relief. The
President generally opposes AMT relief.
If the Congress must compromise on capital
gains, it should insist on the Congress's rate caps
for all taxpayers,
AMT, rather than
opposes indexing,
30% exclusion of
including those subject to the
the far less effective exclusion
proposed by the President. In
exchange, it should leave
indexation for another day.
Taxation of capital gains
is double taxation. The correct
rate of tax on all capital gains,
whether real or inflation-
induced, is zero. Indexing
would reduce the taxation of
inflated gains, but would do
nothing to reduce the taxation
of real gains.
The price of an asset, such
as a share of stock or a piece
of an unincorporated business,
is the present value of the expected future earnings
of the asset, after taxes. A rise in expected future
earnings will boost the share price or value of the
business today, producing a capital gain. If and
when the higher earnings come to pass, they will be
taxed as corporate income and/or personal business
or dividend income. To tax the capital gain as well
is to double-tax the additional earnings. This is true
whether the earnings increase/capital gain is real or
due to inflation.
capital gains from taxable income,
resdulting in a top rate of 27.72%,
or- virtually no r-eduction fr-om the
curr-ient 28%I' cap fior upp1er- income
taxpayer-s... [Deprvi~ng additional
taxpayers of elief,] the
President's proposal would
pr-obably r-egar-d the 30%1' exclusion
as a preference item under the
AMT..
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