Harris’s Proposed Capital Gains Tax Rate Would Be Highest for Many Since 1978

As part of the 2024 presidential campaign, Vice President Kamala Harris is proposing to taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
long-term capital gains at a top rate of 33 percent for high earners, taking the top federal rate to highs not seen since 1978.

The highest capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment.
rates in history date to the 1920s, when capital gains income was subject to a maximum rate of 77 percent. Those high rates were reduced starting in 1922 due to concerns about declining capital gains tax revenues. Since 1954, the capital gains tax rate has almost always been lower than the top ordinary income tax rate, which helps move us closer to saving-consumption-neutral taxation.

In 1978, Congress reduced the effective top capital gains tax rate from 39.875 percent to 28 percent. (Of note, some taxpayers experienced a top rate of 49.875 percent in 1978 due to other tax interactions.) The top capital gains tax rate was cut further to 20 percent on a bipartisan basis as part of the Economic Recovery Tax Act of 1981. The rapid reduction in capital gains tax rates led to increased capital gains realizations and capital gains tax revenue, which nearly doubled as a share of the economy between 1978 and 1985.

For a brief period following the 1986 Tax Reform Act, both ordinary income and capital gains faced an increased 28 percent rate (as the law lowered the top ordinary income tax and raised the capital gains tax). The higher capital gains tax rate drove a sharp decline in capital gains realizations and capital gains tax revenue.

Since the changes in the 1970s, capital gains tax rates have remained below 30 percent. Harris’s proposal would reverse that—raising the top rate on capital gains to 33 percent for taxpayers earning more than $1 million. The proposal would also increase the tax rate on long-term capital gains from 20 percent to 28 percent and increase the net investment income tax (NIIT) rate from 3.8 percent to 5 percent. While not as high as the rates seen during most of the 1970s, a 33 percent top rate would be the highest in modern times.

There are also additional state and local capital gains taxes to consider. The current top combined capital gains tax rate is 29.1 percent, consisting of the 20 percent capital gains tax rate, the 3.8 percent NIIT, and the 5.3 percent average of state and local income tax rates on capital gains.

By taxing high earners’ capital gains at 28 percent and raising the NIIT to 5 percent, Harris’s proposals would raise the top combined tax rate on capital gains to 38.3 percent—the second highest in the Organisation for Economic Co-operation and Development (OECD), behind Denmark’s 42 percent. Similarly, under Harris’s proposals, the top tax rate on dividends would be nearly the highest in the OECD.

Under a tax code neutral between saving and consumption, the returns to saving, like capital gains, would not face a tax. However, under a Haig-Simons approach to taxation, capital gains would be taxed like any other form of income. The US takes a middle-ground approach between the two philosophies: capital gains are taxed but at a lower rate than ordinary income. Leaning too far toward taxing capital gains, however, would make the US an international outlier and discourage saving.

Harris’s proposal to increase the capital gains tax rate would lead to a tax rate not seen since the 1970s. It would increase the tax burden on saving at a time when saving rates are already extraordinarily low. Instead, policymakers should prioritize ways for Americans to save more, both to improve their financial security and spur greater investment.

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