Federal tax receipts have been coming in more slowly than expected, according to the Congressional Budget Office. Through the first eight months of the fiscal year, the government received $60-70 billion, or about 3 percent, less than anticipated.
What accounts for the weaker-than-expected receipts? We won’t know for certain until we see 2016 tax return data, but CBO speculated that taxpayers may have “shifted more income than projected from 2016, expecting legislation to reduce tax rates” in 2017. Non-withheld taxes, such as those due on self-employment income and capital gain sales, appear to be responsible for the shortfall.
Taxpayers could save a lot by delaying the recognition of income. This is especially true of investors who can choose when to sell stocks or other assets with accumulated gains. For example, individuals now pay a top rate of 23.8% on long-term capital gains (including the 3.8% net investment income tax). Investors can delay the sale of their assets—and potentially lower their tax rate for long-term gains to 16.5%—if the tax plan proposed last June by the House Republican leadership becomes law.
Short delays in realizing capital gains might not matter much, either to taxpayers or the economy. However, putting off the sale of assets for a long period might expose taxpayers to added risks, for example the risk that their stock could suffer a sharp decline. And delay can prevent others from benefiting from acquiring the property
In the past, Congress avoided this problem by fixing the effective dates for the new capital gain tax rates before passing the legislation. For example, Congress set the effective dates for the last three tax cuts at May 6, 2003 (20% to 15%), May 7, 1997 (28% to 20%), and June 9, 1981 (28% to 20%), about two months prior to passing the legislation. Usually, the effective date was tied to the date of initial Congressional action (e.g., a mark-up of the legislation by the House Ways and Means Committee).
After the Republicans won the presidency and maintained control of the Congress in 2016, taxpayers might fairly have expected capital gain taxes would be cut soon, perhaps in spring 2017. But tax legislation has stalled, and the timing of Congressional action is now uncertain. Congress itself could alleviate this uncertainty by providing an effective date for the new, lower, capital gain tax rates. If so, taxpayers could sell their property at potentially lower tax rates—ending the current lock-up. Of course, Congress would still have to pass the bill, which is yet another risk tax-sensitive investors would have to weigh.