“A tax that places significantly different burdens on taxpayers in similar economic circumstances is not fair. For example, if two similar families have the same income, they should ordinarily pay roughly the same amount of income tax, regardless of the sources or uses of that income.”
— Tax Reform report of the Treasury Department to President Ronald Reagan, November 1984
As Washington grapples with the budget, it might be worth asking a simple question: What would Ronald Reagan do?
He was the last president to preside over a significant tax reform, one that did exactly what both candidates in this year’s presidential election said they want to do: lower tax rates and close loopholes.
And a critical part of that reform was to end the historical system of taxing capital gains at lower rates than ordinary income.
In the name of fairness, the Tax Reform Act of 1986 raised the maximum tax rate on long-term capital gains to 28 percent from 20 percent at the same time it reduced the maximum rate on ordinary income to 28 percent from 50 percent.
Doing that again in a tax reform act of 2013 would do more than raise revenue and increase fairness. It would bring an abrupt end to the “carried interest” tax dodge, in which managers in the private equity business are able to define their compensation as capital gains and thus pay far lower income tax rates than do ordinary people with far less income.