Capital Gains Cut to 0%?

The GOP has been an advocate in recent years for cutting the capital gains and dividend tax rate even further than its current preferential treatment. The argument goes that cutting the tax rate on these passive income sources encourages economic development and the free flow of capital. Recently, a new tax reform plan has circulated among the GOP to eliminate taxation on capital gains entirely. While this proposal will certainly generate headlines, it is unlikely that the proposal has any chance of passing given the current party alignment in Congress. But, it is worth debating and discussing the merits of not taxing capital gains. 

My biggest worry about eliminating taxation on capital gains is unintended consequences of such a policy shift. Principally, eliminating the taxation on capital gains would certainly lead to an increased effort to reclassify income classified as salary to capital gains and dividends (based on the current rate structure, it is likely that a rate cut in capital gains will also result in a rate cut in dividends). These cuts would likely cost the Treasury billions of dollars annually.

For further reading, see Derek Thompson's Atlantic article.