Capital Gains Tax - Need to Understand

Perhaps a more interesting question is,, why is capital gain (and dividend and interest income for that matter) taxed at a lower rate than earned income? Why is it not also taxed for social security and Medicare taxes?

The hint of an answer is of course, a generation of tax policy that diroportionatly favours capital over labor, with the net result being a inexorable transfer of wealth from the many to the few.

Icarus

PS. If you don't think it political, I am afraid you are niave.

 

Tax laws are never simple. I've been self employed for several years: so I get to pay more in social security tax then a wage earner. The other aspect about this question is that social security tax is collected up to $106,800 of earned income: if you're in a higher bracket, then your extra income is not taxed. Capital gains, though, is one of the lowest rates that I'm aware of....I'm planning on keeping all of my investments for as long as possible.

 

The argument I often hear is, that if you tax capital then people won't invest. An argument that I think specious, as evidence by investment rates over time compared to capital tax rates.

Icarus

 

Hi FL_Prius_Driver--

The argument in favor of having capital gains taxed at a lower rate (if at all) is because any accumulated capital, as the product of one's labor, has already been subjected to taxation once - effectively, you're being taxed twice on the money if you (1) make it in the first place, and then (2) dare to use it to make more money.

I think that's crap. Although I'll frequently demand Warren Buffet put his money where his mouth is and send a check to the United States Treasury every year to bring his effective tax rate up to 30%, the most effective solution is:

• Abolish the current "capital gains" tax as we know it
• Count any capital gains as fresh income, subjecting it to income taxation.
• Count capital losses as an adjustment to taxable income, which would have helped mitigated the damage when everyone's 401k's were crushed in the market crash

This would allow Obama's millionaires and billionaires to pay a higher tax rate on their income, while allowing the little guy to invest his money at a comparable rate (the current tax brackets are 10, 15, 20 if I recall correctly?). Since the billionaires are chipping in more now, then they could use that revenue to pay down the debt - or Lord forbid - use the money to cut the working man's taxes.

 

You first said this shouldn't be a poltical thread: I can only see this being a rhetorical question. Tax codes are quite political. If we look at the last times capital gains were lowered, it seems as though it's the consistant tax cut chip that gets thrown in the poker game that politicians bid with.

 

Long term is taxed at a lower rate to encourage longer term investments in place of playing the market like a casino.

 

You're never going to get an apolitical answer to a tax question.
Personally, I'm a semi-flat taxer.
Granted, I'm as hypocritical as all human beings, but to me it seems only fair that we abolish all tax breaks, exemptions, exclusions, etc....and tax all income.
Period.

It won't solve the underlying problem, even if you could get the politicians to sign off on it because the government will spend past zero no matter how much money you throw into the pot.
However (comma!) it would end a lot of people screaming about wanting more tax breaks for their sacred cows (example: EVs) while shrieking about other people's tax breaks.

Doesn't matter though.
It ain't gonna happen!
Maybe when the EU finishes imploding they'll buy a vowel and solve the puzzle, but for right now all the folks in D.C. are just worried about either getting elected, re-elected, or in the case of the zillions of government employees, they're just worried about burrowing in deeply enough not to get RIF'd.

 

The answer is that there is no answer. It's just the way the tax code was written. Of course, on another level, the answer is politics: I'd say the reason capital gains are taxed at a lower rate is to favor the rich.

A related question would be, "Why is interest on most municipal bonds federally tax free?" The answer: It allows cities to borrow money cheaper. But it really just means that the federal government is transferring money to cities via investors in muni bonds. But since it's tied to your marginal tax rate, again it favors the rich.

Both questions are intimately political, because the tax code is written by politicians, for political reasons, and through the political process.

 

lol

 

Although taxes are by definition arbitrary, the standard traditional US long term capital gain tax credits have made sense for many years, to encourage long term investments. What is a little more questionable are the current non-traditonal cap gain tax rates (the so-called Bush era tax cuts) which lowered cap gains taxes below traditional values and even gives tax credit for short-term dividend income from stocks.

 

when you raise capital gain taxes at least long term gains, you not only get the big guy you also get the small guy trying to make money. My wife, her parents and I owned 4- 3 bdrm duplexes, a 3 bdrm single residence and 5 2 bdrm townhouses on a 7 acre piece of land. My wife and I lived in one side of a duplex and managed the rentals for the last 8 years we owned them. We kept new carpeting and appliances in all of them, kept them painted inside and out, all of the lawns mowed, did 90% of all the repairs and remodeling and we both had fulltime jobs as did her parents.
For anyone who has done this they know just how hard it is to do and the hours and hours of work involved. Constantly worrying about keeping them full and making the mortgage payments going to court with the few bad tenants we had. Thank God or ? that we are in WA and not CA where the Renter has all the rights and the landlord few.
After Twenty years, the State and the Federal Government made as much or more than we did. Each family cleared about $130,000, not much for twenty years of blood, sweat and tears, of which there were a lot of each. Where is the "FAIRNESS" in this? Or for that matter in the fact that 40% plus pay no Federal income tax and some even get a refund of money they never paid in the first place.