Originally posted by sh76
Can someone please explain to me why capital gains should be taxed at a lower rate than ordinary income? And be exempt from social security and Medicare tax?
Completely aside from politics, I've considered the justifications and they make no sense! People who work and earn good salaries of 3 or 4 hundred grand pay high taxes (and as, argu ...[text shortened]... lly just the super-rich manipulating the politicians or is there some logic behind any of this?
I've tried, and am somewhat disappointed that the simple arguments don't get through to even a somewhat conservative person. I'll try again.
A few fallacies must be dealt with first. One is that investors are all uberwealthy. Capital gains is often the result of selling a home, either a primary residence or a vacation property, or apartment building. Usually the original investment is saved from earned income taxed at regular rates.
The second fallacy is that people who invest "sit around and do nothing and make a million in capital gains". People who buy rental properties work their butts off, first finding decent investments and then managing those. Even investing in stocks or mutual funds isn't a buy and forget investment, although the investor downloads a lot of the management to the broker or mutual fund manager, and in either case pays for the help.
In any case the investor is creating social good, as is any capitalist entrepreneur, for example low cost housing, or jobs at the companies that his mutual fund owns. The investor also has a potential of losing all or part of his investment, a risk not shared by salaried and hourly employees.
As to people who pay high taxes due to large incomes from wages, salaries or bonuses, I disagree that they ought to pay higher rates. At a level rate, they would still pay significantly more taxes than lower income people. Why not flatten the rates, eliminate the shelters and deductions at all levels, and stop trying to fool people?
As to taxing inheritances, it is looked upon with favor because the "victim" of this theft is dead. Sure it can be argued that the heirs are undeserving, but are they any less deserving that those who ultimately get the handouts? I received about $4000 when my parents died, a four way split which came mostly from what was left from the sale of our family home two decades before their death.
One reason we can be cavalier about ripping off the uberwealthy, heirs, and investors is that most of us aren't them, and it isn't our ox that is being gored. The arguments that these groups, insignificant in numbers have a greater responsibility for the financial support of any nation are pretty flimsy.
Capital gains are one of the best illustrations of the Laffer curve. Taxes on any economic activity tend to discourage that activity. Smart people will avoid doing things where the benefits are all but eaten up by taxation. Suppose for example, that a State decided to tax attorneys contingency fees at a rate double that of hourly charges? Many attorneys would avoid contingency cases, or at best negotiate much higher percentages of settlements in order to pay the higher taxes. A wonderful but difficult book is "Human Action" by Ludwig Von Mises.