Use separate tax rates for qualified dividends and capital gains

[Amy-Xu]

Under current law, qualified dividends and cap gain are taxed under the same rate. Thus in the tax forms and our calculations, the two components are summed up and stacked on top of regular income, jointly determining which tax bracket they fall into and then what rate should be applied.

Ultimately we want to give users the flexibility to apply different rates to qualified dividends and capital gains. However, the order of stacking would affect the rates applied. If we stack dividends first on regular income and then capital gains, in many cases dividends might be taxed at a lower rate than capital gains even when we keep the rates at the same level. And vice versa.

@feenberg Do you think this is something we need to think about in order to separate tax rates of qualified dividends and capital gains? If so, do we have preference of stacking one on top of another, or we should give users the option of either way? Thanks.

[feenberg]

On Mon, 13 Apr 2015, Amy Xu wrote:

Under current law, qualified dividends and cap gain are taxed under the same
set of rates. Thus in the tax forms and our calculations, the two components
are summed up and stacked on top of regular income, jointly determining
which tax bracket they fall into and then what rate should be applied.

Ultimately we want to give users the flexibility to apply different rates to
qualified dividends and capital gains. However, the order of stacking would
affect the rates applied. If we stack dividends first on regular income and
then capital gains, in many cases dividends might be taxed at a lower rate
than capital gains even when we keep the rates at the same level. And vice
versa.

@feenberg Do you think this is something we need to think about in order to
separate tax rates of qualified dividends and capital gains? If so, do we
have preference of stacking one on top of another, or we should give users
the option of either way? Thanks.

I think we can assume that the tax preferred sources (capital gains and
dividends) will always be stacked last. We should give users the ability
to turn off the special treatment separately for dividends and gains, and
possibly allow for the no longer used capital gains deduction (but against
taxable income, not AGI). I don't think we need to allow for the lower
taxed item to be stacked first if it costs us any effort at all.

dan

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[MattHJensen]

The Joint Committee on Taxation writes (pg 43):

For proposals that include concurrent changes to the taxation of dividends and capital gains, the Joint Committee staff generally stacks the dividend provisions before those regarding capital gains.61

[61] Proposed changes in the taxation of income from capital gains is one instance in which the Joint Committee staff adds behavioral response equations inside the ITM. That is, behavioral responses are assigned to each individual affected within the ITM. This more detailed behavioral modeling motivates the decision to stack the analysis of the capital gains component after that of the dividend component in this estimate.