By JLP | December 29, 2012
Interesting piece from IBD: Six Reasons to Keep Capital Gains Tax Rates Low
Two interesting points that I hadn’t really thought about:
Inflation. If an individual buys a stock for $10 and sells it years later for $12, much of the $2 in capital gain may be inflation, not a real return. Inflation — and expected inflation — reduce real returns and increase uncertainty, which suppresses investment, particularly in growth companies.
One solution is to index capital gains for inflation, but most countries instead roughly compensate for inflation by reducing the statutory rate on gains or providing an exclusion to reduce the effective rate.
Double Taxation. Corporate share values generally equal the present value of expected future earnings. If expected earnings rise, shares will increase in value, creating a capital gain to the individual. But those future earnings will be taxed at the corporate level when they occur; thus hitting individuals now with a capital gains tax is double taxation.
Dividends are also double-taxed, with the result that the U.S. tax system is biased against corporate equity and in favor of debt. This destabilizes companies and the overall economy.
Ernst & Young calculates the current U.S. combined corporate and individual tax rate on capital gains at 50.8% — compared to an OECD average of 42.0%.
Our tax burden on dividends is equally out of line. The U.S. disadvantage will get much worse next year with the scheduled tax hikes on capital gains and dividends.
I know I’ve said this many times before but I’m 100% for a low flat tax rate (say 10% to 15%) on capital gains, dividends (not taxed at corporate level), and earned income. Then, we could move on from these discussions. Our government should be able to operate on a 10% to 15% tax.