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November 10, 2015

Bernard Sanders
Senator of the United States of America
U.S. Senate
332 Dirksen Building
Washington, D.C. 20510
Dear Senator,
The Congressional Budget Office has finalized analyzing the proposal that you sent us
regarding 1. Taxing capital gains like ordinary income (eliminating the separate
capital gains tax). In order to score your proposal, the CBO first looked for the 2015
tax brackets and the respective incomes to which they apply. These results can be seen
in table 1.
Table 1. Tax brackets, 2015

Source: http://www.bankrate.com/finance/taxes/tax-brackets.aspx#ixzz3r8ASfNp3

Under your proposal, capital gains are to be taxed as ordinary income, meaning using
the tax rate provided in table 1. Table 2 compares the present tax rate for capital gains
with your proposal. We believe this information will be valuable to you as it will allow
you to compare how tax rates are going to change under your proposal across individual
with different income levels.
Table 2. Present vs. proposed taxes on capital gains

Source: Fake CBO

It is also important that you consider the pros and cons of increasing the tax rate on
capital gains. According to the Real CBO1:

1
https://www.cbo.gov/budget-options/2013/44796


One advantage of raising tax rates on long-term capital gains and dividends, rather
than raising tax rates on ordinary income, is that it would reduce the incentive
for taxpayers to try to mischaracterize labor compensation and profits as capital gains.
Such strategizing occurs under current law even though the tax code and regulations
governing taxes contain numerous provisions that attempt to limit it. Reducing the
incentive to mischaracterize compensation and profits as capital gains would reduce the
resources devoted to circumventing the rules.
Another rationale for raising revenue through this option is that it would be progressive
with respect to peoples wealth and income. Most taxable dividends and capital gains are
received by people with significant wealth and income, although some are received by
retirees who have greater wealth but less income than some younger people who are still
in the labor force. Therefore, raising tax rates on long-term capital gains and dividends
would impose, on average, a larger burden on people with significant financial resources
than on people with fewer resources.
A disadvantage of the option is that raising tax rates on long-term capital gains and
dividends would influence investment decisions by increasing the tax burden on
investment income. By lowering the after-tax return on investments, the increased tax
rates would reduce the incentive to invest in businesses. Another disadvantage is that
the proposal would exacerbate an existing bias that favors debt-financed investment by
businesses over equity-financed investment. That bias is greatest for investors in firms
that pay the corporate income tax because corporate profits are taxed once under the
corporate income tax and a second time when those profits are paid out as dividends or
reinvested and taxed later as capital gains on the sale of corporate stock. In contrast,
profits of unincorporated businesses, rents, and interest are taxed only once. That
difference distorts investment decisions by discouraging investment funded through
new issues of corporate stock and encouraging, instead, either borrowing to fund
corporate investments or the formation and expansion of noncorporate businesses. The
bias against equity funding of corporate investments would not expand if the option
exempted dividends and capital gains on corporate stocklimiting the tax increase to
capital gains on those assets that are not taxed under both the corporate and the
individual income taxes. That modification, however, would also reduce the revenue
gains from the option.
Another argument against implementing the option is that, by taxing long-term capital
gains and dividends at higher rates, certain undertakingssuch as starting a new
business or investing in a new technologymight be less profitable, and investors might
therefore undervalue their benefits to the economy. The option could also encourage
people to hold on to investments longer than they would prefer so as to postpone the
capital gains tax, although taxpayer responses would vary over time and depend on the
type of investment. If assets are held until death, the tax is avoided entirely. Postponing
the sale of assets, however, means that people could not modify their holdings to suit
their current needs.


Finally, it is important to note that Dowd et. al (2012)2, from the real CBO, estimated the
tax elasticity of capital gains and found a persistent estimate of -0.79 and a transitory
estimate of -1.2. Based on the real CBO estimate for capital gains, the Fake CBO was
able to construct a series for capital gains under your proposals. The results can be
found on table 3.
Table 3. Change in US income if capital gains are taxed as ordinary income
Source: Fake CBO based on real CBO estimations.

We are currently working on scoring the rest of your proposals. If there is anything else
we can do for you, just let us know.
Best regards,

Fake CBO Analyst















2
https://www.cbo.gov/sites/default/files/112th-congress-2011-2012/workingpaper/43334-
TaxElasticityCapGains_0.pdf

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