Capital gains - what should the rate be?

Last week (9/20/12), the House and Senate tax-writing committees held a joint hearing - Tax Reform and the Tax Treatment of Capital Gains.  There was testimony on reasons to tax capital gains at lower rates and reasons not to. I will leave that reading to you (it is interesting).  There was also an editorial in the Wall Street Journal on 9/21 - "A Capital Gains Primer - Why a tax rate differential is fair and helps the economy."  Not surprisingly, it suggests that any call to raise the current, temporary 15% rate on capital gains "ignores the vital link between tax rates and capital investment. The lower the tax, the greater the incentive to take risks."

I think there is a lot more to this debate than the traditional views for lower rates such as to adjust for inflationary gains, to stimulate the economy, etc.  I'd like to raise a few items to consider in the discussion of what the rate should be on capital gains.  And, just a reminder of the reason for the focus on this topic now.  First, for 2013, the top rate on capital gains returns to 20% (18% if the asset is held over 5 years). And, high income individuals (income over $200,000 or $250,000 if married fling jointly) will have an extra 3.8% Medicare tax on all or a portion of their investment income starting in 2013 (per IRC Section 1411).

1. The Tax Reform Act of 1986 lowered the individual rates on all income to a top rate of 28%. That included the rate for capital gains.  Everyone seemed fine with that.  So, why the concern now that the rate has to stay at 15%? 
2. In 1997, President Clinton and Congress lowered the capital gains rate to 20% (18% if held over 5 years).  So, what is wrong with 20%?   
   
3. Any effort to lower the corporate tax rate, perhaps from 35% to 25%, needs to find a revenue neutral path.  It will be difficult if not impossible to cut enough special tax rules for corporations to get to a 25% revenue neutral rate.  Some of the revenue likely will have to come from the rate on capital gains. (See Nellen, The Rough Road to a 28% Corporate Tax Rate (11/10/11)). The discussions of corporate tax reform and capital gains taxation needs to merge and also include corporate integration (taxing corporate income once).
4. I always find it hard to believe that all capital gains help the economy.  Does someone selling Disney stock and buying Intel stock, for example, stimulate the economy and create jobs?
5. There is a good amount of revenue in the rate on capital gain question.  Of course, it is difficult to determine behavioral effects. Certainly if the rate were increased to 35% or higher, there would likely be fewer capital gain sales. But, it doesn't seem that anyone is talking about that.  President Obama's FY 2013 budget proposal includes having the capital gains rate return to 20% for higher income taxpayers and for that group to also have dividends taxed as ordinary income.  The revenue estimates from OMB on these two items are roughly $36 billion and $206 billion over 10 years, respectively.  (I'd recommend returning the capital gains rate to 20% for all taxpayers, not just higher income. I would like to see the issue of the rate on qualified dividends tied to the discussion on corporate tax reform).
6. Capital gains are mostly earned by higher income taxpayers.  For example, for 2009, per IRS data, 9% of returns with "Taxable net gain" had AGI of $250,000 or more. But looking at the percentage of the total "taxable net gain" dollar amount, 74% of such gains were on the returns of those with AGI of $250,000 or higher.
7. If there is to be any differential on capital gains, should it be through a lower rate or a deduction or exemption (such as a 60% deduction like we had years ago)?  I think states prefer a differential rate because it makes not conforming to it easier. But what is simpler for federal income tax purposes?

What do you think? What should be included in the capital gains debate? How should such gains be taxed? What about taxation of capital losses?

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