Debates about federal taxes tend to focus on the tax rates levied on ordinary earned income and on tax deductions taken mostly by wealthy households. But there’s another front in the battle for tax justice: the tax code’s preferential treatment of income from capital gains (that is, from profits on investments). This preference fuels inequality and financialization alike.
Thanks to this tax break for capital gains, households keep more of their income from investment after taxes than they keep from their wages and salaries. This is because income received from profits on the sale of investments is taxed at a lower rate than the same amount of income from salaries and wages. Because the wealthiest households earn the bulk of capital gains every year, the tax code’s preference for this form of income overwhelmingly benefits the rich.
In 2016, for example, nearly 76 percent of all capital gains went to households earning more than $1,000,000, according to estimates by the Tax Policy Center. And 96.2 percent of the households in the top 1 percent of the income distribution are white. Preferential treatment for capital gains meant that the federal government forewent $109.5 billion in taxes in 2016, a giveaway second only to the tax exclusion for employers’ contributions to employees’ health plans.
The tax break for capital gains also enables the oversized financial sector to wield enormous influence on the U.S. economy. It encourages corporate executives to take stock-based compensation, because it’s taxed more lightly than the same amount of salary income would be. This practice encourages executives to obsess over short-term stock-market performance at the expense of the long-term success of the corporation.
The capital gains tax preference might seem wonkish, but it cuts straight to the heart of neoliberalism because fundamentally, it rests on the assumption that investors and investment matter most in our economy and in our society—and therefore, tax policy should privilege these actors and these practices. It presupposes that financial markets guarantee the economic self-determination of all those who strive to invest. And it assumes that those markets recycle capital gains back into the economy to fund entrepreneurs, business expansion, and employment—despite all evidence to the contrary.