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  1. Standard member sh76
    Civis Americanus Sum
    16 Oct '12 15:58
    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?

    Please? Someone?

    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, arguably, they should) but people who sit around and do nothing and make a million in capital gains should have an effective tax rate of half of that??? It just makes no sense.

    Same question for inheritances.

    Is it really just the super-rich manipulating the politicians or is there some logic behind any of this?
  2. 16 Oct '12 16:53
    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?

    Please? Someone?

    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.
  3. Subscriber no1marauder
    It's Nice to Be Nice
    16 Oct '12 17:07
    Originally posted by normbenign
    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. ...[text shortened]... higher taxes. A wonderful but difficult book is "Human Action" by Ludwig Von Mises.
    The "taxes are theft" crap never seems to go away.
  4. Subscriber no1marauder
    It's Nice to Be Nice
    16 Oct '12 17:17
    Originally posted by normbenign
    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. ...[text shortened]... higher taxes. A wonderful but difficult book is "Human Action" by Ludwig Von Mises.
    A little dated but sufficient to show how the "fallacy" that the main beneficiaries of the special treatment on capital gains are the wealthy is no fallacy at all:

    In 2005, the wealthiest 1 percent of Americans received almost 70
    percent of all long-term capital gains—and paid 72 percent of the tax on
    these capital gains.
    # The wealthiest 10 percent of taxpayers enjoyed 90 percent of the capital
    gains eligible for this special tax break.
    # The poorest sixty percent of Americans, by contrast, collectively received
    just 2 percent of the capital gains eligible for the lower capital gains rates.

    http://www.ctj.org/pdf/cg0306.pdf
  5. Standard member sh76
    Civis Americanus Sum
    16 Oct '12 17:18 / 1 edit
    Originally posted by normbenign
    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. higher taxes. A wonderful but difficult book is "Human Action" by Ludwig Von Mises.
    To start, the first $250,000 ($500k for a couple) of a capital gain from a residence is exempt anyway.

    Second, while it is true that some non-wealthy people earn capital gains, the huge lion's share of capital gains are earned by very wealthy people.

    Third, if capital gains were taxed as ordinary income, what would the wealthy do instead of investing in the stock market? Put it in a checking account? Please. On the contrary, maybe it would encourage them to put it back into opening a small business, which would assist the economy much more than the stock market gaining a few points.

    Regarding this and inheritances, I'm not asking that they be taxed disproportionately, just that they be taxed as income, which they are. Let's say I work my butt off and make $120,000 this year and my silver spoon neighbor Dave does nothing but earns $120,000 from a trust fund his daddy set up for him. Fine. I don't begrudge him. But to say that I should be taxed heavily on that income and he should not be taxed at all (or taxed at a low rate if his distribution is a capital gain) is grossly unfair and inefficient. This is not about victimizing anyone or determining who is less deserving; it is about basic fairness.
  6. 16 Oct '12 17:26
    Below is part of an article I found. It highlights three reasons: the tax is not adjusted for inflation, it is a double tax and the desire to encourage present consumption over future consumption. I omitted a chart that showed that showed that the US capital gain rate is very high and in a world economy having high taxes certain would decrease investment in the US. I also think it is worth noting that while capital gains is not taxed for Social Secuirty or Medicaire one does not get any future benefits from those sources of income either. Finally, in the United States we have different taxes at different rates (income, sales, property, cigarette, gift, estate, customs are all at different rates). I tend to believe the obsession with raising capital gains taxes (but not worrying about equality of rates in other things or its general effect) is really not about equality but a pretext for some to raise taxes on those that they do not like.

    Why Capital Gains are taxed at a Lower Rate
    June 27, 2012

    By:


    David Block

    William McBride.

    The justification for a lower tax rate on capital gains relative to ordinary income is threefold: it is not indexed for inflation, it is a double tax, and it encourages present consumption over future consumption.

    First, the tax is not adjusted for inflation, so any appreciation of assets is taxed at the nominal instead of the real value. This means investors must pay tax not only on the real return but also on the inflation created by the Federal Reserve.

    Second, the capital gains tax is merely part of a long line of federal taxation of the same dollar of income. Wages are first taxed by payroll and personal income taxes, then again by the corporate income tax if one chooses to invest in corporate equities, and then again when those investments pay off in the form of dividends and capital gains. This puts corporations at a disadvantage relative to pass through business entities, whose owners pay personal income tax on distributed profits, instead of taxes on corporate income, capital gains, and dividends. One way corporations mitigate this excessive taxation is through debt rather than equity financing, since interest is deductible. This creates perverse incentives to over leverage, contributing to the boom and bust cycle.

    Finally, a capital gains tax, like nearly all of the federal tax code, is a tax on future consumption. Future personal consumption, in the form of savings, is taxed, while present consumption is not. By favoring present over future consumption, savings are discouraged, which decreases future available capital and lowers long term growth.

    Not only has a low capital gains tax rate worked to encourage savings and increase economic growth, a low capital gains rate has historically raised more in tax revenue. At a 2010 talk at the Cato Institute Dr. Daniel J. Mitchell and Dr. Richard W. Rahn argued that the government has actually raised more revenue with a lower long term capital gains tax rate than a higher rate. For example, in 2007 the IRS raised $122 billion with a 15% tax rate as opposed to $7.8 billion in 1977 ($26.7 billion in 2007 dollars) with a 40% tax rate. In fact, when President Bush signed into law a cut in the top rate from 20% to 15%, revenue increased from $51.3 billion in 2003 to $137.1 billion in 2007 (although it fell significantly after the 2008 financial crisis, understandably).

    Attempting to use the tax code to address income inequality will likely disappoint those who seek to attack the lower tax rate on high net worth individuals caused by a lower capital gains and dividends rate. Inequalities caused by globalization and differing education levels will not be remedied by destroying future investment; to the contrary those most likely to be hurt the most by lower economic growth are those with lower incomes.

    The intensification of international competition for lower corporate tax rates has been highly publicized, but international capital gains taxation has been largely ignored. Capital gains taxation adds another layer of taxation onto American businesses, making them less competitive. The table below shows how the U.S. stacks up in terms of the total taxation of corporate investment. The first column shows the U.S. capital gains rate (federal plus state) is above the OECD average. Thirteen countries in the OECD have no capital gains tax. The second column shows that the U.S. integrated capital gains tax rate (corporate rate plus capital gains) is the 4th highest in the OECD. This burden will rise to the highest in the OECD starting January 1 if the Bush tax cuts are allowed to expire and the Obamacare investment surtax of 3.8% goes into effect.

    The combination of history, international competition, and the destructive nature of the capital gains tax suggests any attempts to raise revenue by raising rates are doomed to failure. The focus on June 28th should not be on raising the capital gains rate, but should instead be focused on how to keep the rate low. History shows that this is the most effective way to both raise revenue and promote economic growth.
  7. 16 Oct '12 17:29
    Originally posted by no1marauder
    A little dated but sufficient to show how the "fallacy" that the main beneficiaries of the special treatment on capital gains are the wealthy is no fallacy at all:

    In 2005, the wealthiest 1 percent of Americans received almost 70
    percent of all long-term capital gains—and paid 72 percent of the tax on
    these capital gains.
    # The wealthiest 1 ...[text shortened]... capital gains eligible for the lower capital gains rates.

    http://www.ctj.org/pdf/cg0306.pdf
    What you have proved again, is that the wealthy are disproportionately taxed. Their capital gains at lower rates produce huge revenues. Want to stop that? Increase rates.
  8. Subscriber no1marauder
    It's Nice to Be Nice
    16 Oct '12 17:31
    Some more facts worth pondering before you waste your time on discredited laissez faire theorists of the mid 20th Century:

    Neither candidate, though, contests the Bush administration’s basic logic: that a lower capital gains rate encourages investment, which creates jobs and helps the economy grow.


    “If they found the relationship (between capital gains rates and growth), they’re saving it for a special time” —Leonard Burman

    That doesn’t mean they’re right. Leonard Burman, who teaches economics at Syracuse University’s Maxwell School, presented a graph at the joint hearing that plotted capital gains tax rates against economic growth from 1950 to 2011. He found no statistically significant correlation between the two. This was true even if Burman built in lag times of five years. After several economists took him up on an offer to share his data, none came back having discovered a historical relationship between the rates and growth over those six decades. “I certainly did throw the gauntlet down for the true believers,” says Burman. “If they found the relationship, they’re saving it for a special time.”

    More proof that the rationale behind the Bush tax cut doesn’t hold up comes from the Congressional Research Service, a nonpartisan group run by the Library of Congress. In mid-September CRS released a paper that analyzed economic growth and changes to the top marginal tax rates, both for personal income and capital gains, from 1945-2010. “The reduction in the top tax rates appears to be uncorrelated with saving, investment and productivity growth,” it concludes. “The top tax rates appear to have little or no relation to the size of the pie.”

    http://www.businessweek.com/articles/2012-10-03/low-capital-gains-taxes-may-not-help-the-economy
  9. Subscriber no1marauder
    It's Nice to Be Nice
    16 Oct '12 17:32 / 1 edit
    Originally posted by normbenign
    What you have proved again, is that the wealthy are disproportionately taxed. Their capital gains at lower rates produce huge revenues. Want to stop that? Increase rates.
    It shows no such thing. Nor does history support your assertion:

    So no, the reduction in the capital gains tax rate from 20% to 15% in 2003 did not result in an increase in revenue over the course of the business cycle. In 2000 receipts totaled $119 billion, which equals $143 million in 2007 dollars. In 2007, they totaled $122 billion. That’s a 15% decline.

    http://business.time.com/2008/01/28/do_capital_gains_tax_cuts_incr/
  10. Standard member sh76
    Civis Americanus Sum
    16 Oct '12 17:37
    Originally posted by quackquack
    Below is part of an article I found. It highlights three reasons: the tax is not adjusted for inflation, it is a double tax and the desire to encourage present consumption over future consumption. I omitted a chart that showed that showed that the US capital gain rate is very high and in a world economy having high taxes certain would decrease investmen ...[text shortened]... ory shows that this is the most effective way to both raise revenue and promote economic growth.
    Those are flimsy justifications. In any case, the issue is not whether you can find a justification for them (you can justify anything) but whether the scheme makes sense over-all.

    indexed for inflation,

    You could make the same argument with any type of income. A person who earns money at the office might be paid with money that the company has held for years and might be based on an investment in training that was done many years ago. A small business owner who earns a profit might be seeing returns on business investments from a decade or more ago. Most income can be attributed in some way to actions of long ago.

    it is a double tax,

    Most things are taxed at every step in the stream of commerce. If I earn money from my boss, that money was taxed also when my boss earned it. If I earn money from my customer, that money was taxed when my customer earned it. A capital gain or inheritance is just another stage in the stream of commerce and should be treated as such.

    and it encourages present consumption

    First, encouraging present consumption may be a good thing as it stimulates the economy now. But aside from that, wealthy people do not need an incentive to save. they're going to save the excess of what they want to consume in any case.
  11. 16 Oct '12 17:37
    Third, if capital gains were taxed as ordinary income, what would the wealthy do instead of investing in the stock market?
    The idea that huge increases in taxation would not change behavior is simply untrue.
    One major effect would be to shift investment to places with lower taxes. People move to locations with lower taxes all the time (see US population trends) and businesses move overseas (see outsourcing).
    Another major effect would be to simply see the decrease in profitability with the same level of risk and simply forgo otherwise profitable opportunities. Besides the obvious direct loss of taxable money, it also would lead to a direct loss of jobs and the benefits of whatever product would be produced.
  12. 16 Oct '12 17:38
    Originally posted by sh76
    To start, the first $250,000 ($500k for a couple) of a capital gain from a residence is exempt anyway.

    Second, while it is true that some non-wealthy people earn capital gains, the huge lion's share of capital gains are earned by very wealthy people.

    Third, if capital gains were taxed as ordinary income, what would the wealthy do instead of investing in t ...[text shortened]... t about victimizing anyone or determining who is less deserving; it is about basic fairness.
    These days a lot of pretty ordinary homes fall above those exclusions.

    Raising rates may have the undesired effect of putting investing out of the reach of non wealthy people.

    What would the wealthy do? What are they now doing? At least according to the left? Holding and waiting on the sidelines. Venture capitalists do exactly what you suggest, but are reluctant if the risk/reward ratios don't make sense.

    You want them to be taxed as income, and they already have been. Now when someone puts that saved income at risk and profits you want it taxed as income again.

    It has nothing to do with "fairness" but everything to do with whose ox is being gored. Increases in capital gains rates never produce projected revenues, while decreases always produce higher than projected revenue.
  13. Subscriber no1marauder
    It's Nice to Be Nice
    16 Oct '12 17:39
    Originally posted by sh76
    Those are flimsy justifications. In any case, the issue is not whether you can find a justification for them (you can justify anything) but whether the scheme makes sense over-all.

    [b]indexed for inflation,


    You could make the same argument with any type of income. A person who earns money at the office might be paid with money that the company has hel ...[text shortened]... n incentive to save. they're going to save the excess of what they want to consume in any case.[/b]
    Personally, I wouldn't have a problem with the gains being indexed for inflation which would make economic and accounting sense.
  14. Subscriber no1marauder
    It's Nice to Be Nice
    16 Oct '12 17:40
    Originally posted by normbenign
    These days a lot of pretty ordinary homes fall above those exclusions.

    Raising rates may have the undesired effect of putting investing out of the reach of non wealthy people.

    What would the wealthy do? What are they now doing? At least according to the left? Holding and waiting on the sidelines. Venture capitalists do exactly what you suggest, b ...[text shortened]... ver produce projected revenues, while decreases always produce higher than projected revenue.
    I already showed the last sentence is wrong except in the very short term.
  15. Subscriber no1marauder
    It's Nice to Be Nice
    16 Oct '12 17:42
    The usual sycophants of the rich are regurgitating the usual nonsense of why their income is soooooooooooooooooooo much more important than everybody's else.