Americans for Tax Reform asks for clarification on applicability of 2.9% surtax on capital gains

If so, the marginal tax rate on capital gains will rise to 22.9 percent

Americans for Tax Reform today sent a letter to President Obama asking him to clarify whether or not the 2.9 percent surtax on "unearned income" applies to capital gains. If Obama's tax increase does fall on capital gains, the marginal tax rate on capital gains will eventually rise to 22.9 percent from today's level of 15 percent. The full text of the letter is below:

Dear President Obama:

Your healthcare reform proposal of February 22nd contains a host of new tax increases on the American people. However, there is some confusion as to the precise nature of one of these tax hikes. I am writing today to ask that you clarify for taxpayers exactly what this one tax hike does.

The tax hike in question is found in Title IX, "Revenue Provisions." It is in the section entitled, "Broadened Medicare Hospital Insurance (HI) Tax Base for High-Income Taxpayers." In particular, I am referring to the following sentence:

In addition, it would add a 2.9 percent tax for such high-income households to unearned income including interest, dividends, annuities, royalties and rents (excluding income from active participation in S corporations).

There is a type of unearned income which is conspicuously-absent from that list—capital gains. If the 2.9 percent surtax applies to capital gains, the current rate of 15 percent would ultimately rise all the way to 22.9 percent (since the rate is scheduled to go up next year to 20 percent). This would be a very large hike in the capital gains tax rate.

According to the IRS Statistics of Income Division, the latest available tax year reported $760 billion in net capital gains in households making at least $200,000. Over ten years, if the 2.9 percent surtax applied to this income, it would increase taxes by nearly $300 billion.

The Joint Committee on Taxation has privately scored your plan under the assumption that it does not tax capital gains in this way. However, a February 22nd report in Bloomberg stated that an un-named administration source confirmed that the 2.9 percent tax did, in fact, apply to capital gains.

Which one is it, Mr. President? Is the "unearned income" list you provided exhaustive, as the JCT has assumed? Or is it an incomplete list, one which failed to include capital gains, as the Bloomberg report suggests?

Paul Hoffmeister, chief economist at the Chicago-based Bretton Woods Research LLC, a research group for Wall Street money-management firms, estimated a 2.9 percent tax on unearned income would produce a 3.5 percent to 4 percent decline in the broad stock indices, according to the Bloomberg report. That's a direct hit on both taxable brokerage accounts and tax-deferred accounts like IRAs and 401(k) plans. It will affect anyone with any money in the stock market, which includes a majority of adults and two-thirds of voters.

In the interest of transparency and full disclosure in the healthcare debate, I don't think it's too much to ask that a multi-hundred billion dollar tax hike be made known in full well ahead of any further Congressional votes on healthcare.

The PDF of the letter can be found here: http://www.atr.org/userfiles/030910lt-capgainsyn.pdf