Economics
Should capital gains be taxed at the same rate as wages?
Reward for risk or loophole for the rich?
ANALYSISApril 13, 2026
The question of whether capital gains should be taxed at the same rate as ordinary wages remains a live and politically contested policy debate in 2025. The 'One Big Beautiful Bill,' signed into law on July 4, 2025, left long-term capital gains tax rates unchanged, preserving the preferential structure that caps long-term gains at 20% versus a top ordinary income rate of 37%. The Biden administration's proposal to nearly double the capital gains rate to 39.6% for earners over $1 million was never enacted.
The wealthiest Americans often pay a lower tax rate than the people who work for them — is that a rational incentive to grow the economy, or a rigged system that lets capital compound while labor pays full freight?
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Revenue-maximizing rate vs. full equalization
Conservative
The Tax Policy Center's own modeling puts the revenue-maximizing capital gains rate at approximately 28% — not 37%, not 39.6%. That single number demolishes the progressive case on its own terms: even if you accept every equity argument the left makes, pushing rates above 28% would likely produce less revenue for the very programs equalization advocates want to fund. Chasing ideological purity past the revenue peak is not fiscal policy — it's symbolism.
Liberal
We agree on the 28% figure, which is precisely why the reform we're defending targets that threshold — rate parity for millionaires paired with stepped-up basis elimination, not a blunt 37% rate. The conservative framing treats this as a concession that defeats our case, but it actually confirms the current 20% cap is indefensible on revenue grounds alone.
Conservative
If the actual proposal is 28% plus basis reform, that's closer to the conservative reform position than to the progressive one — and we should both say so honestly. The remaining dispute is a calibration argument, not a foundational disagreement about whether the current structure is optimal.
Liberal
Agreed it's calibration — but 'calibration' that has locked in a 20% cap for decades while generating $370 billion in annual foregone revenue isn't caution, it's capture. The burden is on defenders of the status quo, not reformers.
Carried interest and wage income fairness
Conservative
The carried interest treatment is genuinely incoherent, and conservatives who defend it wholesale are not being rigorous. But the solution to a specific distortion is to fix that distortion — not to restructure the entire capital gains tax on the basis of a hedge fund manager's compensation structure that most investors don't share.
Liberal
The carried interest example isn't cherry-picked to make the argument look easier — it's the clearest illustration of a logic that runs through the whole preference: a private equity partner clearing $10 million pays a lower marginal rate than a nurse practitioner earning $120,000. That isn't an anomaly. That is the distributive logic of the current system, applied consistently.
Conservative
The nurse and the hedge fund manager are not the only people affected by the rate — every pension fund, endowment, and small business owner who converted years of risk into equity is in this pool too. Designing capital gains policy around the most sympathetic labor-versus-capital contrast is not the same as designing it well.
Liberal
Pension funds and endowments are largely tax-exempt entities — they don't pay capital gains tax in the first place. The people actually bearing the preferential rate are overwhelmingly the top earners: 70% of the benefit flows to households above $1 million. That's not a contrast designed for sympathy; it's the Tax Policy Center's distributional data.
1986 and 1988–89 historical precedent weight
Conservative
Critics of the preference are entitled to cite 1988 and 1989 as evidence that equalization isn't catastrophic — those were two years at a 28% rate during falling inflation and strong equity markets, and the republic survived. But two years at 28% in favorable macro conditions is not a sustained test of 37% or 39.6% equalization, and the conditions do not generalize.
Liberal
The conservative characterization of those years as too limited to generalize is actually the most honest version of a weak response. What 1988–89 demonstrates is that the catastrophic investment freeze conservatives warn about is rate-sensitive, not inevitable — and at 28%, which is where we're proposing to land, the claimed harms are empirically modest.
Conservative
We don't dispute that 28% didn't freeze markets in 1988 — we're disputing that it generalizes to today's environment, where the rate proposal comes alongside basis reform, behavioral uncertainty, and a transition period in which both changes hit simultaneously before either has fully settled.
Liberal
Transition risk is real, but it's an argument for phasing the reform carefully — not for preserving a structure that Congress itself restored in 1997 for reasons that had more to do with lobbying than evidence.
Lock-in effect as structural problem
Conservative
The lock-in effect is not a conservative talking point — it is a documented economic mechanism. High capital gains rates cause investors to hold appreciated assets rather than sell, deferring realizations indefinitely and then extinguishing the liability entirely at death through stepped-up basis. Full equalization without eliminating stepped-up basis would actually worsen the avoidance problem it claims to solve.
Liberal
That last sentence is an argument for pairing equalization with stepped-up basis elimination — which is exactly what we're proposing. The lock-in critique, taken seriously, should have produced a policy that combines a higher rate with basis reform. Instead it has produced a 20% cap and untouched stepped-up basis. The critique hasn't driven the policy; it's rationalized it.
Conservative
Pairing both changes simultaneously is theoretically elegant but practically risky — investors facing higher rates before basis reform is fully operative may lock in during the transition regardless, producing the revenue shortfall the 28% threshold is designed to avoid. Sequencing matters as much as the final destination.
Liberal
Sequencing is a legitimate implementation concern, but 'we need to phase this carefully' has been the answer for forty years. At some point sequencing becomes indefinite deferral, and that is the status quo we're actually in.
Inflation indexing and phantom income taxation
Conservative
Equalization without indexing capital gains for inflation is taxing phantom income — this is not a conservative talking point, it is a mathematical fact. When an asset appreciates 50% over a decade but inflation rises 30%, the real gain is 20%, not 50%. Taxing the nominal gain at full ordinary income rates means the government is collecting tax on purchasing power the investor never actually received.
Liberal
The inflation indexing argument has genuine merit — but it's been available to conservatives for decades, and the policy response has been neither indexing nor equalization. It's been a flat preference at 20% that happens to also benefit nominal gains in low-inflation years and real gains in every year. If the concern were truly inflation distortion, the remedy would be indexing, not a blanket rate discount.
Conservative
A blanket rate discount is an imperfect but administratively simple proxy for inflation adjustment — the alternative, full asset-by-asset indexing, introduces its own complexity and gaming opportunities. Imperfect instruments don't become indefensible just because a theoretically cleaner alternative exists.
Liberal
An imperfect proxy that systematically over-compensates high earners by hundreds of billions annually isn't a reasonable administrative compromise — it's a design choice, and the beneficiaries are not random.
Stepped-up basis as the core avoidance mechanism
Conservative
Stepped-up basis is where the real avoidance problem lives: investors hold appreciated assets until death, the gain disappears entirely for tax purposes, and the heir receives a reset cost basis. The lock-in effect and the stepped-up basis provision together create a permanent, legal, and fully predictable path to zero capital gains taxation — which means the current system's headline rate is far less meaningful than it appears.
Liberal
We agree that stepped-up basis is the central avoidance mechanism, which is why basis reform is half of our proposal. But if the conservative position is that basis is the real problem, the response should be basis reform — not continued defense of the 20% preferential rate that makes holding until death even more attractive than it would be under a higher rate.
Conservative
We support basis reform — the honest conservative position is that the current system frozen in amber is not the goal. The disagreement is whether to pair basis reform with a rate increase to 28% or treat basis reform as sufficient on its own, which is a genuinely different policy outcome.
Liberal
Basis reform without a rate increase leaves the underlying incentive to defer intact — it just removes the terminal escape hatch. You need both levers to actually change behavior, and acknowledging that is the honest version of this argument.
Conservative's hardest question
The 1988–1989 period of rate parity at 28% is genuinely difficult to dismiss — the economy functioned, investment continued, and no catastrophe resulted from equalization. A rigorous critic can fairly argue that conservatives are defending a preference that survived that test intact, which undermines the strongest version of the lock-in and growth-suppression claims.
Liberal's hardest question
The revenue-maximizing rate argument cuts against full equalization at 37% — if the Tax Policy Center's ~28% threshold is correct, pushing rates above that point could actually reduce collections by triggering lock-in behavior and increased sheltering, meaning aggressive equalization might be both economically and fiscally counterproductive. This is not a fringe concern; it is a mainstream empirical finding that any honest case for rate parity at the top bracket must directly address rather than wave away.
The Verdict
Both sides agree
Both sides accept that the revenue-maximizing capital gains rate is approximately 28%, meaning neither full preservation of the current 20% rate nor full equalization at 37–39.6% is the optimal fiscal policy.
The real conflict
The sides genuinely disagree on a factual-predictive question: whether pairing a rate increase with stepped-up basis elimination would reliably raise revenue or trigger a transition-period lock-in severe enough to undercut collections before the combined reform stabilizes.
What nobody has answered
If both sides converge on roughly 28% as the right rate, and both acknowledge stepped-up basis is a genuine avoidance problem, what is actually preventing a bipartisan reform package — and does the answer to that question reveal that neither side wants the reform they claim to want?
Sources
- Web search results provided: IRS/tax code data on capital gains and ordinary income rates (2024–2026)
- Web search results provided: Urban-Brookings Tax Policy Center estimates on distribution of capital gains benefits (2022 data)
- Web search results provided: Tax Policy Center revenue-maximizing rate estimate (~28%)
- Web search results provided: Congressional Budget Office / tax expenditure data — $370 billion foregone revenue (2025)
- Web search results provided: Biden FY25 budget proposal details
- Web search results provided: One Big Beautiful Bill Act provisions (signed July 4, 2025)
- Web search results provided: Historical capital gains rate parity years (1988, 1989, 2000)
- Web search results provided: State-level capital gains tax treatment summary
- Web search results provided: Project 2025 / Heritage Foundation capital gains proposals
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