Should the Capital Gains Tax Rate Remain Low?

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.

34 responses to Should the Capital Gains Tax Rate Remain Low?

  1. The mafia says, “Pay us money so we can protect you.” The business owner says, “I don’t want protection I’m doing just fine!” The mafia says, “Well, you aren’t protected from us. Pay up or else!” The business owner says, “Oh, yeah, hears all the money you want, thank you for doing business with us!”

    Hhhmm, sounds like the government to me. The only difference is the government pretends to be legitimate – by calling it “taxes” instead of “extortion.” I grateful for all the governments good works just like I’m grateful for the “charitable” works the mafia does.

    Let us stop advocating that the government/mafia “tax” us at all. Then, we could move on from these discussions.

  2. Not sure how no taxes would work, Jon.

  3. Why should investment gains be taxed at all? Don’t all taxes on capital gains and dividends discourage investment–the life blood of capitalism?

    • Theoretically, as Jon mentions, we shouldn’t have any taxes at all. But, I don’t see how that would work in the real world.

  4. I’m kinda with THC…. why should investment gains be taxed at all? On the other hand, why should income derived from my hard work be taxed at all? So, it comes down to gubment has gotta tax somebody to pay the bills. It’s like a giant leech and we’re the host. It has to drain enough blood from us to suit its needs, without killing us. It selects the strongest among us (the upper income taxpayer) because that is more efficient (read: politically feasible).

    Okay, to be serious (not that I wasn’t being serious) for a moment, on balance, I’d prefer a lower cap gains rate over a lower income tax rate. less than 15% is a giveaway, 15% would be good, 20% not so good bad, +20% quite disastrous.

  5. At the risk of getting completely off-topic, discussing what tax rates should be is meaningless as long as government spends more than it takes in.

  6. THC wrote:

    “At the risk of getting completely off-topic, discussing what tax rates should be is meaningless as long as government spends more than it takes in.”

    Agreed.

  7. @JLP,

    Not sure how no taxes would work, Jon.

    That’s like telling an abolitionist, “Who’s going to pick the cotton?” It doesn’t matter. What matters is that it is wrong to enslave a population. Things will work themselves out for good.

  8. @JLP,

    A book like “Healing Our World In An Age of Aggression” tells you how it would work, using many real world examples and statistics.

  9. “Our government should be able to operate on a 10% to 15% tax.”

    Only if we eliminate every deduction/exemption/loophole, including the personal exemptions, standard/itemized deductions, and all the 401k/IRA/HSA/etc tax-shelters.

    To be “fair”, we’d need to eliminate all of the payroll/AMT/FICA-MED and any other ‘side’ federal taxes as well.

    Then the tax code would be much simpler, and everyone would be paying their “fair share” because everyone would be paying the exact same rate on all sources of income (work-income, dividends, cap-gains, “carried interest” income, etc).

    Of course, to get down to 10-15%, we’d need massive cuts in spending as well.

  10. I agree, if capital gains are taxed at all the rates should be kept very low. It is absolutely double taxation. The higher the rate, the more it discourages capital investment, which has a direct impact on job creation. Keeping rates low will spur more growth and actually generate more revenue for the government.

  11. I’m all for that, BG. A flat tax with no exemptions or deductions — better yet a flat sales tax — is the way to go.

    But neither will happen, because the power to tax (or not) is the power to get campaign contributions from those who would be affected.

  12. I agree with Jack. Taxing power and campaign contributions are very much interwoven in our political structure. Unfortunately, a large segment of the population is more concerned with abortion and gay marriage than national fiscal health and prosperity, while another large segment is concerned saving trees and taxing the rich while paying little tax themselves.

    The circus continues…

  13. And both those segments are in the Democrat Party.

  14. Another large segment of the population is more interested in fighting (illegal) wars and allowing business owners to dictate which medications female employees can take, than the fiscal health of this nation.

    See how easy it is to come up with these strawmen?

  15. Who wants to allow business owners to dictate which medications their female employees take?

    And yes, 0bama did continue action in Libya beyond his legal authority.

  16. Jack) Answer: Republicans

    How easily predicted that the GOP led house of representatives are blocking the fiscal cliff bill the Senate overwhelmingly passed 89-8 this morning.

  17. >> Who wants to allow business owners to dictate
    >> which medications their female employees take?

    > Answer: Republicans

    Really? When has ANY Republican ever proposed that?

  18. > GOP led house of representatives are blocking
    > the fiscal cliff bill

    Good!! It INCREASES spending.

    Anyway, any bill to raise revenue has to originate in the House of Representatives. So who cares what the Senate passes unless it has passed the House first?

    Harry Reid wouldn’t even bring up the bill the House passed last month. Seems to me the Democrats were blocking then.

  19. “Really? When has ANY Republican ever proposed that?”

    The most famous(ly ridiculed) is Mike Kelley R-PA.

  20. Show me the bill.

  21. OK — you can’t do that. I understand.

    So show me ANY statement that Kelley, or any other Republican, has made saying that he “wants to allow business owners to dictate which medications their female employees take?”

  22. “Anyway, any bill to raise revenue has to originate in the House of Representatives. ”

    The bill doesn’t technically raise revenue compared to what it’d have been in 2013 without it. Without the bill, the Bush tax cuts would’ve expired and the tax rates would’ve gone up for everyone which would have resulted in another recession and 9% unemployment. The bill kept lower rates for people earning less than 400K.

  23. On the contrary, kitty. The Bush tax “cuts” INCREASED revenue to the government. The democrats themselves said that allowing the cuts to expire for everyone would have resulted in a recession and LOWER revenue!

  24. The millionaires are already paying 15%. Mitt Romney proved that when he released his ONE tax return. I wonder what was on the ones he didn’t release?

  25. Wrong again, John. Romney and most other millionaires start by paying 35% on the income their corporations make, THEN what trickles down to them in the form of capital gains and dividends is taxed AGAIN as personal income.

  26. Jack) See below a snippet of Roy Blunt (R-MO) Amendment #1520 to to PPACA.

    This is a law/ammendment put forth by Republicans for the sole purpose of allowing business owners to decide which PRESCRIPTION medications are covered under their health plans.

    I’m sorry, but if a person is forced to see a doctor to purchase a specific medication (instead of it being over-the-counter), then all health insurance plans should have to cover the doctor’s visit, and any drug-insurance plan should cover the prescription medication as well (like any other drug) — regardless of whether the business owner has a conscientious hangup with that medication or not.

    ———-


    ““(6) RESPECTING RIGHTS OF CONSCIENCE WITH REGARD TO SPECIFIC ITEMS OR SERVICES.–

    “(A) FOR HEALTH PLANS.–A health plan shall not be considered to have failed to provide the essential health benefits package described in subsection (a) (or preventive health services described in section 2713 of the Public Health Service Act), to fail to be a qualified health plan, or to fail to fulfill any other requirement under this title on the basis that it declines to provide coverage of specific items or services because–

    “(i) providing coverage (or, in the case of a sponsor of a group health plan, paying for coverage) of such specific items or services is contrary to the religious beliefs or moral convictions of the sponsor, issuer, or other entity offering the plan;”


    ———-

  27. Jack – but they would’ve expired without the deal, wouldn’t they?

  28. Oh Jack – what increased revenue to the government was the economic boom that in part was caused by the housing bubble. So saying how the tax cuts were the only thing responsible for the boom is quite simplistic.

    You are forgetting the housing bubble and burst all the time. You are blaming democrats for crash and bad economy completely ignoring the credit crisis that occurred at the end of Bush era.

    Oh and by the way, what about all the money Bush spent in Iraq?

  29. “Another large segment of the population is more interested in… allowing business owners to dictate which medications female employees can take…”

    “This is a law/ammendment put forth by Republicans for the sole purpose of allowing business owners to decide which PRESCRIPTION medications are covered under their health plans.”

    Do you see the difference, BG?

  30. “[What] increased revenue to the government was the economic boom that in part was caused by the housing bubble. ”

    Other way around. People had more money which they used to bid up the price of real estate.

    “You are blaming democrats for crash and bad economy completely ignoring the credit crisis that occurred at the end of Bush era.”

    No, Bush signed the legislation that raised the Minimum Wage, so he is just as culpable as the Democrats in Congress that passed it and crashed the economy.

  31. “[What] about all the money Bush spent in Iraq?”

    ALL of the spending on Iraq and Afghanistan during the Bush years is less than a SINGLE year of 0bama deficit spending.

  32. “Do you see the difference, BG?”

    No, the amendment was written in such a way to make it appear innocent — but the driving force behind the amendment is right-wingers who want to push their religious beliefs on women who work for them.

  33. Nonesense. They can buy whatever they want. My employer won’t buy me a gun either, is he imposing his anti-Second Amendment views on me?