Monday, May 03, 2010

Tax capital gains at the same rate as ordinary income

Capital gains, income from the sale of so-called "capital assets" is taxed at dramatically lower levels than ordinary sources of income like wages.  The lower capital gains rate is really just a huge handout to the very wealthy and stock speculators.  Capital gains should be taxed at the same rate as ordinary income.
There those who say that the capital gains tax should somehow take into account inflation and argue that the lower capital gains rate makes up for inflation.  Ordinary working people are also subject to inflation and no one is adjusting their taxes to make them whole for inflation.  Why is it that the super wealthy and stock speculators get some sort of special tax rate? 
The very wealthy and stock speculators can frequently structure their income so that it constitutes "long term capital gains" which qualify for a reduced rate of taxation--usually less than that paid on so-called "ordinary income" paid on wages--and are not subject to withholding for FICA taxes the way wages are.  As a result, capital gains may be taxed at roughly a half of the effective rate paid on wages.
The lower rate the capital gains tax gives to so-called "long term capital gains" (i.e. gains from the sale of capital assets held for more than a year) also encourages relatively short-term speculation as opposed to long-term investment meant to generate income in the form of annual dividends.  As a result, investors "churn" their holdings looking to cash in on relatively short term increases in stock value as opposed to holding stock over the long term, participating in management, and ensuring that a company is run responsibly to produce income over the long run. 
The long term capital gains tax rate is in part responsible for incentivizing spectacular corporate flameouts like Enron's by encouraging stock price manipulation at the expense of effective (and honest) management practices.  The long term capital gains rate has done more than any other single factor to create the generation of kleptomaniac CFOs that American business has been saddled with for the last thirty years.
Taxing capital gains at the same rate as that charged on other forms of income would effectively remove much of the incentive to speculate and encourage instead responsible long term investment and participation in management by investors.  To be fair, part of achieving this goal must be a reduction in the double taxation of corporate income, perhaps best achieved by way of a dividends paid deduction ("DPD"), but that is a topic for another post.


James Young said...

You truly demonstrate what a Marxist you are with this.

Nothing is a "handout" when it allows the people who earn it to keep it.


J.C. Wilmore said...

Silly James,

I'm not suggesting they be taxed more than wage earners, just that they be taxed the same.

Can't we agree that two people who make $100,000 ought to pay the same tax on it? I think we can both agree that we'd like to pay less, all things being equal. But how can anyone justify making working people pay 28% Federal income, plus state income, plus 7.65% FICA (a combined rate of about 40% in Virginia) while a wealthy person pays 15% on investment income?