Repeal the Surtax

Dallas, Wednesday night. The line was built for the hall.

“If the Republicans win,” the president said, “you win with us and you get $5,000.” He called it a Trump Dividend. Spend it in America. Pretend he is on the ballot one more time.

I have a counter-proposal. It is not a check. It is not conditioned on an election night. It does not require the Treasury to invent a mailing list of a quarter-billion adults and then police where they shop. It is better policy, and it is actually achievable.

Repeal the Net Investment Income Tax.

I have been making the larger capital-gains case on this site since April of last year, first in Friday Forecasting, then in It’s Time to Cut the Capital Gains Tax, then against the smaller tariff-rebate idea in A Better Option Than Rebate Checks, and at full philosophical length in Tax the Fruit, Not the Branches and From Branches to Booms. The horizon has not changed. This column is not that horizon. This column is the provision that should have been killed in 2013 and has been sitting in the Code ever since, pruning new growth to help pay for a health bill.

Start with the check, because that is what the country just heard.

A dividend is what a firm pays from earnings it already has. A $5,000 payment to every adult citizen, borrowed against a debt stock that crossed $40 trillion last month, is not a dividend. It is a transfer. Count adult citizens and the cost is in the neighborhood of $1.2 trillion. Count every adult and it runs closer to $1.3 trillion. Congress has to appropriate it. The last two versions of this promise, the DOGE checks, the tariff rebate checks, never cleared that bar. Vice President Vance was already narrowing the Dallas version before the hall emptied: not necessarily everyone, paid from tariff receipts, details to follow. That is not a mysterious failure of will. It is what happens when a rally line meets the Appropriations Committee.

The check also answers the wrong problem. If the complaint in the country is prices, you do not borrow another trillion dollars and tell people to spend it by November. If the complaint is that capital is trapped, you do not mail consumption. You change the rule that traps it.

Here is the rule.

Ordinary income is fruit. You harvest it this season. The government may take a share of what the tree already produced. Capital gains are not fruit. They are new branches. The firm that was worth one thing is worth more because someone deferred consumption, took risk, and built a larger productive structure. Those limbs are what make next year’s harvest bigger. When you tax the limb, you do not raise more fruit. You prune.

I have used that picture before because it is the whole argument. You may tax wages. You may tax the apple. You do not tax the extension of the tree and then wonder why the orchard stops spreading.

The Net Investment Income Tax is that prune, written into law as an afterthought.

It is a 3.8 percent surtax on net investment income, capital gains, dividends, interest, passive rents and royalties, passive business income, for households whose modified adjusted gross income clears lines that have not moved since 2013: $200,000 single, $250,000 joint. It was not designed as capital-gains policy. It was a pay-for in the 2010 Health Care and Education Reconciliation Act, the companion to the Affordable Care Act. Wage earners already faced a Medicare tax. The authors wanted a matching levy on “unearned” income so the health expansion would score. They froze the thresholds. They went home.

Thirteen years later the statutory long-term capital-gains rate is still 0, 15, and 20 percent. Add the NIIT and the top effective rate is 23.8 percent. The same 3.8 points sit on qualified dividends and on the sale of a building or a book of stock that has been working for a decade. Short-term gains, already taxed as ordinary income, can be stacked into the mid-40s. The IRS collects it on Form 8960. In 2023, 8.1 million returns paid a bit more than $39 billion. Most of the dollars come from households over $500,000, which is what critics will say first and which is not an answer. The line was never indexed. Every year it reaches further into the dual-income professional household that does not look like a private-equity closing. That is not targeting. That is a 2010 number left to rot in place.

The economic harm is the lock-in, not the press release about “the rich.” An investor who would sell an appreciated asset and put the capital into a better use does not sell, because the sale is the event that rings the surtax. Capital stays in yesterday’s winner. The business founder who spent ten years plowing every dollar back into the firm, then sells to fund the next one or to retire, hands the government nearly a quarter of the gain at the top of the stack. That is not a harvest tax. That is a tax on the limb that would have seeded the next grove.

CBO and the Joint Committee on Taxation have the NIIT raising on the order of $640 billion over the coming decade. Tax Foundation’s older dynamic score for full repeal ran about $445 billion over ten years; conventional scores sit higher. I will not pretend that is free. I will not pretend a $5,000 check is cheaper. The check is two to three times the ten-year cost of killing the surtax, paid in a single burst, with no lasting change to the incentive that produced the money. Repeal is a rule. The check is a night.

What I have argued since April 2025 still stands as the larger project: lower and simpler rates on realized gains, a bias toward long-held productive American assets, and an end to the compliance maze of exclusions, deferrals, and cliffs. That is the file. It is not this vote. A four-rung holding-period ladder is a bill you write when you have the votes and the time. Full zero on every realization is a destination, not a markup. Repeal of section 1411 is a single provision. Ways and Means knows how to draft it. Finance knows how to score it. Reconciliation can carry it. A standalone can carry it. No new agency. No “must be spent in the United States” clause that no one can enforce. No condition that the House and Senate first survive November.

That is what achievable means. I have watched good capital-gains ideas miss vehicles before. H.R. 1 did not take the structure I laid out last June. That is not a reason to stop asking. It is a reason to ask for the piece that can actually be written into the next tax title instead of the piece that photographs well under arena lights.

The honest objection is distributional. Killing the NIIT raises after-tax income at the top of the file more than at the bottom. A $5,000 check, if it ever arrived and if it were not inflated away, would be a larger percentage of a median paycheck. Grant the arithmetic. Then ask what you are trying to do. If the project is a visible mailing before an election, the check wins the slogan and loses the Congress. If the project is to stop using a health-care offset as a second tax on saving and realization, you delete the section. You do not put a quarter-billion people on a ledger and call it growth.

There is a cleaner Medicare argument, if Medicare is the real concern. Make it in the payroll tax. Do not hide a hospital-insurance levy inside every stock sale and every 1099-DIV. A funding gimmick from 2010 is not a theory of capital.

So here is the counter-proposal, in the form that can survive contact with a committee.

Repeal the Net Investment Income Tax. Strike section 1411. Take the top effective long-term rate from 23.8 percent back to the statutory 20. Stop charging the ACA’s leftover 3.8 points on the sale of an asset, the dividend from a firm, the interest on a bond, the rent from a building someone already paid tax to acquire. Leave the larger rate structure for the next fight, the one I have already written.

Do not mail $5,000 because a convention needed a cheer. Do not condition a transfer on who holds the gavel in January. Do not call borrowed consumption a dividend.

Tax the fruit if you must. Stop pruning the branches to pay for a bill that was never about the orchard. That is better policy. That is the policy you can pass.