Three Cheers for the ACA’s Surtax on Investment Income

Blog Post by: Benjamin Landy , on July 8, 2012

Earlier this week, I explained how the majority of new revenue raised by the Affordable Care Act will come from the richest 5 percent of households; hardly the apocalyptic middle class tax hike Republicans have described. But end-times rhetoric (“Obama lies; freedom dies”) is more exciting than wonky explanation, as Fox News has discovered. “Democrats can fight back,” writes Mother Jones’s Kevin Drum, “but only by explaining that the mandate tax will only be paid by about 4 million people, not everyone, and then explaining that the other taxes in Obamacare mostly fall on high earners and corporations. This is, needless to say, a losing strategy. If you’re explaining, you’re losing; and if you’re explaining about taxes, you’re digging yourself a big fat grave.” In other words, good policy doesn’t always make good politics.

That being said, I’m surprised more people on the left aren’t talking about the 3.8 percent surtax on investment income over $200,000 ($250,000 for joint filers), which will be a major source of funding for the Affordable Care Act beginning in 2013. The current 15 percent tax on income from capital gains—of which more than two-thirds go the richest 1 percent—is the main reason why wealthy households often pay a smaller share of their income in taxes than those who earn less, and is one of the primary drivers of income inequality in the United States. Of course, there are a number of reasons why we should eliminate the preferential treatment given to capital gains (Century Foundation vice president Greg Anrig lists ten of them here), not least of which is the principle that income from investments should not be treated as more beneficial to society than income from work.

Forget about the optics: any increase in the tax rate for capital gains is a victory for economic fairness. If more Americans saw graphs like the one above, that message just might play well on television, too.

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