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Capital Gains Tax

  1. Oct 11, 2004 #1


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    One of the big stick-it-to-the-rich issues has always been capital gains taxes. I've always been against them because they don't just affect the rich, they effect anyone who ever sells stock or a house, which is the vast majority of the population. That said, someone who gets most of their income from stocks (Bill Gates types) should still be paying taxes on that. I don't know how, but a perfect solution to this just popped into my head: make the first $50,000 (per year, per person) deductable. The rest would be taxed at the usual 15% (except for stocks held less than a year, which as now are taxed as ordinary income).

    I could (maybe) be talked into upping it to 20%, though there is some truth to the argument that doing so hurts the economy by discouraging the movement of money in and out of investments. Also, I'm still not in favor of treating all of it like ordinary income because it isn't ordinary income. I'd rather not get into a discussion of that aspect of this, but the reasoning is that "ordinary income" is an expense for a business. It comes out of the business's profiits. Investment income is not a cost for anyone.

    I choose $50,000 because thats what I consider a resonable middle class retirement income for a retired person living off a 401K. It also covers a retired couple selling a $250,000 house to live in a $150,000 condo. But if Bill Gates wants to sell a hundred million of MSFT to buy a yacht, he'll pay 15%.

    Last edited: Oct 11, 2004
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  3. Oct 11, 2004 #2


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    Well, someone like Bill Gates, or really, any of the super-wealthy people in our society make their money off of capital gains rather than from work. By fixing the captial gains tax at something as low as 15% you're essentially making tax regressive by putting the very wealthy into a 15% tax bracket. At the same time, this type of tax change would make the current investments that people have much more valuable - effectively this is using the government to put money into the pockets of the wealthy and invested at the expense of the not-so-wealthy.

    I agree, in principle, with the notion of progressive capital gains taxes, but I don't think that the peak captial gains tax rate should be so low. I would suggest that any practical progressive captial gains tax should take the rate of return into account as well as the actual return.

    Also, the way you describe things is a bit unclear. Do you mean $50k per year of appreciation, or do you mean a limit of $50K of untaxed asset sales, or do you mean $50k of untaxed gains per year per person? Is the the limit cumulative? Of course, I know almost nothing about tax-law or accounting, so someone who is more experienced will probably be able to ask more probing questions.
  4. Oct 11, 2004 #3


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    The reason I think long-term capital gains should be treated differently than ordinary income is they are different. And maybe the taxes need to be reduced on the input more than the output:

    The main reason is that capital gains are generally the second time your money is taxed. If you earn $1000 and want to put it in the stock market, you really only have ~$700 (depending on your bracket) to put into the stock market because of the income tax. If in 40 years, that $700 is now worth $7,000, you pay another ~$1400 when you sell the stock (oversimplified). But had the government not taxed it the first time, the second time around, you'd have $10,000 and the government would get $3,000. And if reducing the taxes a little bit (like for the lower-end investors) stimulates investing, it has a proportionally larger impact on revenues and a secondary effect of improving the economy.

    All that said, I'm not wholly opposed to increasing the rate for those on the upper end while decreasing it for those on the lower end.

    And to clarify, I mean $50K of untaxed gains per year per person - ie if you buy a house for $150K and sell it for $201K, thats a one-time capital gain of $51K, of which, $1K is taxed and the rest is not. Rethinking, that may be a little high (I'll think about it some more).
  5. Oct 11, 2004 #4
    homes are EXEMPT under the current rules from capital gains
    if you live in them a few years up to 500,000 for a married couple [250k each]

    why should UNEARNED [worked for] income be taxed less than a worker pays on earned income
    remember SS tax that every worker pays is allmost 15% in addition to regular income tax starting at 10% for a base rate of near 25% after deductions+ child credits ect

    plus dividends are now tax free
    and capitial gains rates are below 20% and droping under current laws to 15%
  6. Oct 11, 2004 #5


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    Really, what you're talking about here is a kind of tax deferrment for captial investments, rather than reduced or changed capital gains taxes as in the original post. This idea has it's own merits and flaws.

    My understanding is that the government only taxes the gain rather than taxing the 'principal' and the gain, but I'm not that familiar with the way the taxes work. Hence, there really isn't double taxation taking place.

    Well, another thing is, that 150k->200k in one year, and 150k->200k over 10 years are very differnt animals. IMHO the latter should be taxed much less than the former.
  7. Oct 11, 2004 #6
    Man, my head hurts, I need to buy like Economics For Dummies or something.
  8. Oct 12, 2004 #7


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    Ok, didn't realize that - my parents were *****ing about it when they recently sold a vacation condo. I didn't know here was a difference.
    My main probem is that (for some people) you're taxing the same money twice. Tax-deferred retirement funds get around some of that, but not all. Inherited stocks and stock options should be treated differently again. Right now (if I understand correctly), your inheritence gets taxed when you get it and again if it turns a profit. Stock options should probably be taxed as income at the option price.

    My secondary reasoning here is that investments are an enabler for the economy. Income allows you to buy a car, but its investments that enable the car company to build the factory. Add to that the fact that investing in the stock market or bonds or CDs or whatever are better for both the individual investing and the economy than just putting the money into a savings account: this should be encouraged as much as possible. Via supply and demand, the gov't can generate more taxes by lowering the rate - and that should be the goal. Taxes aren't meant to be a redistribution process. Heck, the government would probably make more money in the long run if they made all capital investments tax-deferred.
    Somewhat, yeah. But let me give an example: 8 years ago, I got a loan for extremely low interest via the Navy. I put most of the money into a mutual fund and withdrew monthly to pay off the loan. It didn't work out as well as I planned (both the market and my spending habits conspired against me), but the point is, when it did turn a profit, it got taxed. Where I think capital gains need to be taxed is not where they provide a small supplimental income, but where they provide the vast majority of a person's income (perhaps a ratio would work...).
    That's correct: in the house example, the principal is the $150K that the house cost to buy, and the capital gain is the $51K difference between the buying and selling price. The reason I consider it double-taxation is that it comes from the same asset: the money used to buy that house already got taxed before the house was bought. Any tax at the sale of the house is a second time you get taxed on the same asset. I do realize its a much smaller amount because its only on the capital gain.

    Say for my $150K house example, your average income tax was 30%. That means it took $214K of income to buy the house and the government got $64K of that. But maybe I'm just complaining about taxes are too high in general....
    Certainly - there already is a sliding scale, but maybe we can extend it further. Doing so could result in both more profits for investors (because it encourages them to hold their investments longer) and more tax revenue due to the higher resulting capital gains.

    Actually, this is kinda the opposite of our Social Security debt: tax deferred capital gains through investments are (in a way) you holding on to and investing the government's money, paying them more taxes in the end than if you had paid them up front. The result is profit for both you and the government. Social Security is you paying the government up front, the government flushing the money down the toilet, then paying you back via a pyramid scheme, causing you to collect less than you would have if you or the government invested it and the government to be horribly in debt.
    Last edited: Oct 12, 2004
  9. Oct 12, 2004 #8


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    Wish I said that.

  10. Oct 12, 2004 #9
    My view on capital gains tax is that it is double jeoperady and should be abolished altogether. It would allow for more people to get out of poverty. Or at least have a better chance to.
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