Capital gains taxes

1. Apr 5, 2005

Pengwuino

Does anyone else think that capital gains taxes for the average person is rather unfair? My family currently has about $50,000 in debt. We could sell a rental we own for a profit of$80,000. Sounds great right? Well... of course... the government comes in and takes a HUGE slice (reduced to higher 20% range thanks to President Bush) of this away. Of course, the $80,000 is also before all the costs involved in selling a house. Now is it just me... or is it is weird that when you get the facts straight and look at the situation through non-political glasses... the tax makes no sense. Am I wrong in wondering why the government will get$15,000 or so on basically the act of an asset changing hands? I mean i can pretty much trade anyone a cup or a computer or something and the whole idea of a tax on that would be proposterous. Is it just me or does it seem kinda odd that we're paying a huge tax on basically a change of hands. And i hope no one starts crying about "oh big liberal rich people want this" or "big republican business wants that"...

2. Apr 5, 2005

Chi Meson

This would apply to anything that is taxed, really. Why are there taxes in the first place? THey are supposed to pay for public servces, to run the government, and support the armed forces. The citicenz are gonna have to cough up the money in the form of taxes somehow. THe alternative is the "libertarian" angle where everything is privately owned, and instead of taxes we pay fees. Same thing.

So if you make money, you pay a percentage of what you earn because (it is assumed) the more money you have, the more you use up public services plus the more you can pick up the slack for those who can't pay their fair share.

Capital gains are a form of income, so they are taxed. Gambling winnings are taxed (minus losses of course), lottery winnings are taxed, money you find on the street is also supposed to be taxed.

I never understood the reasoning for the special level of taxation for capital gains: I suspect that CG is mostly earned by rich folk, so the richer you are, the less overall you pay. Oops, I'm getting political.

3. Apr 5, 2005

Just a little off-topic here, but assuming you own the property free-and-clear, why not take out a home-equity loan on the property, pay off the debt, and use the other $30,000 for anything else you need? You could also deduct the interest from repayment of the loan, reducing your current tax liability as well. 4. Apr 5, 2005 russ_watters Staff: Mentor True, taxes are somewhat arbitrary (regardless of what politicians claim), but capital gains are a toughie (to me) depending on where they come from. I think its right that long term capital gains are taxed lower than normal income because they aren't normal income, they are multi-year income (<1 year capital gains are taxed as normal income). Ie, if you make$50,000 this year or $25,000 this year and the same next year (both in normal income), they are taxed at different rates because taxes are calculated yearly. Trying to calculate capital gains based on yearly appreciation would be extrordinarily difficult, so the result is a flat 15% (currently, iirc) for long-term capital gains. The next reason to keep capital gains low is simply to stimulate investing. If you invest instead of spending and make money, that's money that didn't exist before and the government wouldn't have had an opportunity to tax if you hadn't invested it. I'm sure economists can figure out where the supply/demand curves meet on that - optomizing government revenue by keeping the tax rate low enough to stimulate investing but high enough to make tax revenue. Now, for "old money" or guys like Bill Gates, who derive virtually all of their income from capital gains, I fully support making that ordinary income. But it needs to be done in such a way as to not penalize the other 99% of investors who aren't multi-millionaires for saving their money. Perhaps a ratio - ie, if more than half of your income is capital gains, it gets taxed as normal income. edit: observation: Its always strange to me how when people think about investing and capital gains, they think of the super-rich and not themselves. The vast majority of investors in the US are not multi-millionaires. Also, there needs to be an exepmtion for guys like Pengwuino based on the planned usage of that money (ie, if you use it to pay off a mortgage, its not taxable as income). And, most importantly, it needs to not penalize guys like me who have saved for 5-10 years for a house and plan to sell some stock for a downpayment. As above, had I bought a$30,000 car instead of a $20,000 car, the government would not have had the opportunity to tax the profit that that$10,000 generates over 10 years (made-up numbers). Yes, that money would allow more taxes for the car company, but it does not create as much new wealth to be taxed as investing does.

Last edited: Apr 5, 2005
5. Apr 5, 2005

BicycleTree

The creation of wealth and the investing of money are two different things. If you invest in the entertainment industry then no or very little new wealth has been created; if you invest in research than possibly much wealth has been created. If you buy a car and this contributes to the research budget of the car company then this creates more wealth than investing the money in a frivolous business such as entertainment, tourism, or luxury goods. If you invest in something like cigarettes then your investing might actually destroy wealth.

6. Apr 5, 2005

BicycleTree

Wealth is determined by the useful value of goods. Goods that are destructive, such as Double Whoppers, or contain no value in themselves, such as hood ornaments, do not contribute to the total wealth available.

7. Apr 5, 2005

Staff Emeritus
BicycleTree, both your posts are based on the idea that wealth has a moral component. It doesn't. The money from hood ornaments and Whoppers spends just as good as money from a cure for cancer.

8. Apr 5, 2005

Staff: Mentor

Two separate misunderstandings (SA addressed the second) - the first, BT, was that you don't seem to buy into the idea that a good is worth whatever someone is willing to pay for it and that "intrinsic" value is meaningless in economics.