Professor Lee believes that the generic capital gains rate should not be increased over 28 percent for revenue and political reasons. But to reflect that, on the average, capital gains realized by middle-income families consists entirely of inflation gain, while half of the capital gain realized at the 31- percent bracket and above consists of economic gain, increasing to 80-percent economic at the very top, he argues that a greater exclusion should be provided at the 28- and 15-percent brackets, either by a "progressive schedule" or by a $3,500 annual exclusion. To strengthen the political base for increasing the top rates and to avoid the risk of the conservative coalition in Congress passing a generic capital gains cut as an offset, he advocates that the top current rate on income retained in expansion of an active business by a passthrough entity be limited to 34 percent, with the full top individual rates imposed when the retained earnings are withdrawn or the interest in the entity disposed of. The author also recommends that the proposed small business corporation tax cut should expire as to subsequent new small-business issues if the provision does not attract sufficient outside capital during a test period. Lee further recommends against taxing at death unrealized capital appreciation, because it almost certainly would engender a generic capital gains cut.

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59 Tax Notes 1399-1418 (1993)