A liberal tax policy--passed by conservative icon Ronald Reagan a generation ago--could make it a breeze to pay for Barack Obama's health care reform. 

The policy is equal taxes on income from wealth and income from work, and it was a key part of Reagan's Tax Reform Act of 1986. In a major shift, the Act both raised the tax on long term capital gains and set the rate the same as that on earned income. 

Returning to an equal-tax policy would come close, all by itself, to paying for the health care bill now before Congress. This simple truth was hidden away in the preliminary 2008 capital gains data just released by the Internal Revenue Service. Here are the numbers from a Bloomberg report: 

"The [IRS] data show that 11.2 million tax returns out of 142.4 million filed last year reported $447 billion from capital gains. Most of that income, $363.3 billion, was earned by 964,160 households reporting overall income of $250,000 or more." That $447 billion in gains, the article noted, was down 40 percent from the $749 billion racked up in 2007. 

Now for some tax arithmetic. At the current rate of 15 percent on long term gains, the Treasury would have realized $67 billion on the gains for 2008. By comparison, if taxes had been paid at the top ordinary income rates of 33 percent and 35 percent, the Treasury's take would have risen to more than $150 billion. The difference between the two figures is $83 billion--not that far from the new Congressional Budget Office estimate of $94 billion a year for the bill now being finalized. Using the IRS's gains figure for 2007, and performing the same exercise, the difference would have approached $150 billion. 

To be sure, the IRS figures do not indicate what portion of the reported capital gains was long term (taxed at 15 percent) or short term (taxed the same as other income). Nonetheless, especially for Blue Dog Democrats and other fiscal hawks, the message is crystal-clear: look hard at Reagan's tax equity policy. 

The Tax Code has long since been taken in the opposite direction. As the Tax Fairness Plan posted on Obama's website in 2008 put it, "For decades, America has been victim to an anti-tax sentiment that has led to tax cuts that favor wealth, not work." 

Nothing does this more neatly than the tax break on capital gains. President Clinton lowered the rate on long-term gains to 20 percent. President Bush cut it again, to 15 percent, little more than half what middle-class Americans pay on their wages. The Bush tax cuts are due to expire at the end of this year, which would return the capital gains rate to 20 percent. In addition--with fiscal strain ahead, and with Reagan guarding his back--President Obama should map out our return to the equal-tax path.  

You can see how Reagan got there by looking into the rationale that's always given for low capital gains taxes--the claim that buying stocks stimulates the economy, growing new businesses and new jobs. Nice try, but The Gipper saw through it.  

Only a trace amount of all the trading on Wall Street grows anything. Small companies with big dreams raise seed money through initial public offerings (IPOs) and secondary offerings. These investments deserve a bigger tax break than they get now; there's a strong case for making them tax-free. All other stock market gains should be taxed the same as wages (which they were, back when).  

Doing so again would raise the cry that the rich were being hosed to pay for health care. On the contrary: tax equity penalizes nobody--on top of which, America's taxpayers will never recover the hundreds of billions in restored tax breaks that Reagan, citing fairness, tried to end. How to pay for health care reform? It could be as simple as once more levying equal taxes on capital gains and other income. It's only fair (and Reaganesque). 

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Gerald E. Scorse helped pass a bill that tightens the rules for reporting capital gains*. He is a member of Responsible Wealth, an advocacy group for economic fairness. 

*"The basis reporting legislation follows years of hard work by Prof. Jay Soled of Rutgers University, Prof. Joseph M. Dodge of Florida State University, and more recently...Gerald E. Scorse, who read about the work of the two professors and decided to make this reform his cause." - Excerpt from David Cay Johnston's Tax Notes column of 10/13/2008  

Copyright 2010 Gerald E. Scorse