Skip to comments.The Right Capital Gains Tax Rate Is Zero
Posted on 04/15/2012 9:47:03 AM PDT by Kaslin
The silly debate about the Buffett Rule is really an argument about the extent to which there should be more double taxation of income that is saved and invested.
Politicians conveniently forget that dividends and capital gains get hit by the corporate income tax. And since America now has the developed worlds highest corporate income tax rate, its adding insult to injury to tax the income again. Actually, its adding injury to injury!
No wonder Ernst and Young found that the United States has a very anti-competitive system for taxing dividends and capital gains. (perhaps its time to copy the clever British campaign against punitive double taxation)
If you believe in fairness, the right capital gains tax rate is zero. John Goodman of the National Center for Policy Analysis, has a good explanation.
Income tax time is an appropriate moment to go to the heart of President Obamas complaint about the taxes Warren Buffett and other rich people pay, or dont pay. What the president is really complaining about is that the tax rate on capital gains is too low. But there is a more basic question to be asked: why tax capital gains at all?
Thats a very good question, because a capital gain isnt income. Its an asset that has increased in value. But the tax only applies on the gain if you sell the asset.
But why does an asset, such as shares of stock, rise in value? According to finance research, asset prices rise in value when theres an expectation that there will be a greater after-tax stream of future income. But that income will be taxed (at least once!) when it materializes, so why tax it before it even happens? John hits the nail on the head.
The companies will realize their actual income and they will pay taxes on it. If the firms return some of this income to investors (stockholders), the investors will pay a tax on their dividend income. If the firms pay interest to bondholders, they will be able to deduct the interest payments from their corporate taxable income, but the bondholders will pay taxes on their interest income. Here is the bottom line: There is no need for the IRS to tax the bets that people make along the way as stock prices gyrate up and down. Eventually all the income that is actually earned will be taxed when it is realized and those taxes will be paid by the people who actually earned the income.
Amen. John is exactly right. Hes making the same arguments I put forward in my video on capital gains taxation.
By the way, the capital gains tax isnt indexed for inflation. So if you bought an asset 30 years ago and its doubled in value, youve actually lost money after adjusting for inflation. Yet the IRS will tax you. Sort of adding injury to injury to injury.
Finally, I like how John closes his column.
why not avoid all these problems by reforming the entire tax system along the lines of a flat tax? The idea behind a flat tax can be summarized in one sentence: In an ideal system, (a) all income is taxed, (b) only once, (c) when (and only when) it is realized, (d) at one low rate.
In this awful period leading up to tax day, isnt it nice to at least dream of a tax system that is simple, fair, and non-corrupt?
Cuts in capital gains taxes actually lead to an increase in tax revenues.
” Politicians conveniently forget that dividends and capital gains get hit by the corporate income tax. And since America now has the developed worlds highest corporate income tax rate, its adding insult to injury to tax the income again.”
The pitiful reality is, we are fighting a losing battle to keep taxes where they are and not increasing.
Capital gains taxes are regressive without doubt. They tax success. Of course income tax does the same.
We are now at a point where almost nothing is not taxed or has a fee associated with it.... NOTHING including the air we breathe.
Drop it down to 5% as start and many foreign business operations would set up shop here and help expand this economy. The Democraps class warfare propaganda machine won’t allow it. To hades with them—we need Conservatives to dominate All the branches of Govt. and just do it. Tall order for the mostly spineless GOP leadership however.
I think that the issue is not that capital gains taxes should be zero, but that they should not be raised.
For me the issue is to NOT penalize capital gains, in preference over not raising some other tax.
For me all “income” taxes (all types) should be lower, flat and collected with no deductions, exceptions or exemptions.
If that were the case, and in that case, as a Conservative I would argue that there is no rational argument that a tax on any income, capital gain or otherwise, necessarily OUGHT to be lower than taxes on other forms of income. In the one straight flat and equal income tax for all incomes, it would not be a ‘penalty’ on capital gains to tax them the same. Earning money by capital gains, or anything else, would require only the rational choices, desires and abilities of the individual, not “the tax code”.
Though I am not advancing the idea that capital gains taxes are now too low, reason demonstrates that they presently have an advantage - to those who pay them - over application of the tax code to wage income.
I would argue that a low single equal flat tax on all incomes, with no deductions, exceptions or exemptions would remedy much about our taxes making any “advantage” for capital gains income unneccesary.