posted on 13 August 2016
from the Congressional Budget Office
In 2010, more than 70 percent of families directly owned property designated under the Internal Revenue Code as capital assets - that is, assets that can be sold and that typically generate taxable capital gains or deductible losses when sold. Families' capital assets included their homes, other real estate, privately owned businesses, stocks, corporate and government bonds (including Treasury bills and notes but excluding Treasury savings bonds), and mutual funds; those assets had a combined worth of $50 trillion.
That amount does not include an additional $20 trillion of other family assets - such as the value of defined benefit and defined contribution retirement plans (for example, 401(k) plans) and balances in savings and checking accounts.
When a capital asset is sold for more than its adjusted basis, the seller realizes a capital gain. (The adjusted basis is the amount of a taxpayer's investment in an asset after adjustments to account for certain factors that change the amount of the initial investment for tax purposes; some factors, such as improvements in a property, increase the adjusted basis, whereas others, such as depreciation, reduce it.) When an asset is sold for less than its adjusted basis, the seller incurs a capital loss. If over the course of a year a family's gains from all assets sold exceed its losses, those net gains can be subject to taxation; if, in contrast, a family's losses exceed its gains, a portion of those net losses can be used to reduce the amount of other income that is subject to taxation.
Most long-term capital gains (those realized on assets held for more than a year) are generally taxed at rates lower than those that apply to wage and interest income. In contrast, short-term gains are subject to the same income tax rates as wages and interest income. In 2010, taxpayers reported about $394 billion in short-term and long-term net capital gains, including those from sales of indirectly held assets (such as those owned by partnerships, S corporations, or mutual funds, or those managed by fiduciaries); they owed about $55 billion in federal income taxes on those gains. By comparison, the sum of reported net long-term gains and net long-term losses from the sale of directly held capital assets - the main focus of this report - amounted to $123 billion.
In this report, CBO and the staff of the Joint Committee on Taxation (JCT) examine the distribution of capital assets and net capital gains and losses in 2010 by type of asset and by the income and age of the asset holder. The analysis of asset holdings is based on data from the Survey of Consumer Finances (SCF), a survey of the finances of U.S. families (consisting of a homeowner or renter, his or her spouse, and their dependent children) that the Board of Governors of the Federal Reserve System conducts every three years. To analyze capital gains reported by taxpayers on their returns, CBO and JCT used information from two different data sets compiled by the Internal Revenue Service (IRS). This report focuses on 2010 because it is the most recent year for which information was available from all three of those data sets at the time that the analysis in this report was undertaken.
How Have Capital Gains and Taxes Owed on Them Varied Over Time?
Both the amount of gains realized and the taxes owed on those gains have fluctuated significantly in relation to the size of the economy over the past 60 years, reflecting variability in asset prices and changes in the tax rate on capital gains, among other factors (see figure below). Capital gains realizations peaked as a share of the economy at over 6 percent of gross domestic product (GDP) in 1986, 2000, and 2007. In 1986, taxpayers rushed to sell assets that they might otherwise have held for longer because the Tax Reform Act enacted that year included an increase in the tax rate on gains that would become effective in 1987. The next two peaks coincided with spikes in the business cycle when stock prices, in particular, were high. In contrast, capital gains realizations were typically lowest in relation to the economy during recessions - falling under 2 percent of GDP in nine years that were at or near the trough of a recession. Revenues from capital gains realizations ranged from a low of 0.2 percent of GDP in 1957 (the year in which realizations measured as a share of GDP were lowest) to a high of 1.24 percent of GDP in 2000 (when realizations relative to the economy spiked).
Realizations of gains and revenues from taxes on those gains have generally moved in the same direction relative to GDP but diverged somewhat in 2013 (the most recent year for which some IRS data are available). Lower tax rates on gains, which were originally enacted as a temporary provision in 2003, had been extended through 2012, and that year, anticipation of a rate increase in 2013 prompted a sell-off of assets, which led to an offsetting reduction in the amount of realizations in 2013. The lower tax rates on capital gains were permanently extended in 2013 for many taxpayers, but the rate reverted to its higher, pre-2003 level for taxpayers in the top income tax bracket. As a consequence, revenues from capital gains taxes measured as a share of total output actually rose in 2013 despite the drop in realizations. That year, taxpayers reported short-term and long-term net capital gains (including those from indirectly held assets) totaling about $511 billion - equal to 3 percent of GDP - on their individual income tax returns and owed about $97 billion in federal income taxes on those realizations.
How Do Holdings of Capital Assets and Realizations of Gains Vary by Type of Asset?
In 2010, two-thirds of families owned their homes, which had a combined value of $21 trillion (before mortgage obligations) - 41 percent of the total value of capital assets. But less than 2 percent of the sum of all net capital gains and net capital losses reported on tax returns was from home sales, a much smaller share than for most other types of capital assets, in part because the Internal Revenue Code allows taxpayers to exclude most of the gains from those sales. Although corporate stock - which was directly held by only 15 percent of families - constituted 7 percent of the total value of capital assets in 2010, stock transactions accounted for two-thirds of the sum of net gains and net losses that year.
The average value of capital assets held by families in 2010 was much greater than the median value, indicating that asset worth was concentrated among a relatively small number of families. The gap between the mean and the median values was largest for privately owned businesses (held by 13 percent of families) and smallest for personal residences.
How Do Holdings of Capital Assets and Realizations of Gains Vary by Income?
Higher-income families generally held larger and more diverse portfolios than those with lower income in 2010. For most families, the home was the largest component of their portfolio, but for families that earned more than $200,000 that year, personal residences accounted for only about a quarter of the total value of their capital assets; their largest holdings were privately owned businesses. Those higher-income families owned about a quarter of the total value of homes, but they held about two-thirds of the total value of nonresidential assets.
Similarly, the proportion of taxpayers in a given income group who reported capital gains was larger for higher-income taxpayers. Fewer than 2 percent of taxpayers with income of $50,000 or less reported net gains on their 2010 tax returns, whereas nearly half of taxpayers with more than $1 million of income reported net gains. Taxpayers in that top income group realized 70 percent of the total value of gross gains (that is, gains before losses) from the sale of shares in partnerships, S corporations, and trusts, but those taxpayers reported less than one-third of the total gross gains from taxable proceeds from home sales. That group also earned about half of all gains from the sale of two of the three types of financial assets that CBO and JCT included among capital assets - stocks and bonds. They received only a quarter of total gains from the third type - mutual funds. In general, net losses on all types of assets were more widely distributed among income groups than were gains.
How Do Holdings of Capital Assets and Realizations of Gains Vary by Age?
In 2010, a smaller proportion of families headed by someone under 35 years of age than of families headed by someone 35 or older owned capital assets, and the value of their holdings was, on average, less than those of the older groups. Younger taxpayers were also less likely to realize any net capital gain, and when they did, their gains were smaller, on average, than those of older taxpayers. Families headed by someone between ages 55 and 64 had the highest average value of capital assets ($850,000), and taxpayers in that age group had the highest average value of net gains ($42,000).
How Have Holdings of Capital Assets and Realizations of Gains Varied Over Time?
The value of capital assets and the amount of net capital gains fluctuated over the 2004 - 2010 period. As the economy expanded from 2004 to 2007, the value of most types of assets held by families increased - stocks by 14 percent, personal residences by 16 percent, and privately owned businesses by 39 percent - but the value of bonds declined. Over that same period, reported capital gains measured as a share of GDP rose by about 60 percent - in part reflecting the tax cut on capital gains in 2003.
From 2007 to 2010 - a period that included the 18-month recession that began in December 2007 - the value of all types of capital assets and the amount of gains realized fell. Stock values dropped by 25 percent; the value of personal residences, by 19 percent; and the value of privately owned businesses, by 22 percent. Capital gains measured as a share of GDP fell by 59 percent.
A Note on Data Sources
The analysis in this report is based on three data sets that contain information on the ownership and sale of capital assets: the Survey of Consumer Finances, a triennial survey of the finances of U.S. families conducted by the Federal Reserve Board; a randomly selected sample of individual income tax returns compiled each year by the IRS; and the Sale of Capital Assets Cross Section (also compiled by the IRS), which includes detailed information on realizations of capital gains.
The scope of the tax return data from the IRS differs from that of the SCF data in a few significant ways. First, the tax data are limited to only those people who filed tax returns, whereas the SCF data represent a cross section of all U.S. families, including those in which no member files a return. Second, the tax data are derived from forms that are required to be filed when taxes are paid, whereas the SCF is a voluntary survey. Third, tax data contain more detailed information about some assets, especially rarely sold assets, such as timber and farmland.
Another difference between the SCF and the tax return data is the unit of observation. In the SCF, that unit is the family, which consists of an individual or couple who owns a given residence or who signed the lease for it and any dependents living at home. The SCF excludes from the family any financially independent people who reside with them. By contrast, tax return data sets are based on the taxpayer, who may be either a person who files an individual tax return or a married couple who file a joint return. In the SCF, a family may include more than one taxpayer; for example, a husband and wife who live together but file separate tax returns would be counted as two taxpayers in the IRS data but as one family in the SCF. As a result, the number of families in the SCF and the number of taxpayers differ: In 2010, there were about 118 million families in the SCF and 143 million taxpayers in the IRS data. Because those data sets underlie different sections of this report, the income groups identified in one section are defined by ranking families by income and in another by ranking taxpayers.
The income measures used in the SCF and IRS data sets also differ. The Federal Reserve Board defines income in the SCF differently from how the IRS measures it in tax returns. Using the detailed information available from the SCF, CBO and JCT developed a new measure of income that was closer to the definition used in the tax return data. In both sections, income generally includes wages and salaries; income from rental real estate, royalties, partnerships, and S corporations; business and farm net income; taxable and tax-exempt interest; dividends; net capital gains; other gains or losses; and unemployment compensation. Because of limitations in the data, however, the definitions of income - and therefore the income groups identified - still differ somewhat from section to section of this report. The most notable differences are as follows: In the section on capital assets, which uses data from the SCF, estate income is excluded and all distributions of pensions, individual retirement accounts, annuities, and Social Security benefits are included; in the section on capital gains and losses, which uses tax data from the IRS, income from estates is included, and only the taxable distributions of pensions, individual retirement accounts, annuities, and Social Security benefits are included. Unless otherwise indicated, families and taxpayers with negative income (that is, families and taxpayers with business or investment losses greater than their other income) are excluded from the lowest-income group but included in calculations for all income groups.
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