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I think one of the most ingenious political ploys in American history was when the wealthy convinced the working class that capital gains should be taxed at a l

I think one of the most ingenious political ploys in American history was when the wealthy convinced the working class that capital gains should be taxed at a lower rate than income taxes. I'll never forget having lunch with my co-workers, all of whom were paying 30-35% in income taxes, lecturing me that a 20% capital gains tax was unfair because the investor, "already paid taxes" on that money when it was first income, so taxing the gains amounted to double-taxation. I've never understood the argument that raising the capital gains tax would slow economic growth either. Why would people give up free money just because they have to give a little more back to the government that makes the marketplace possible?

jumpman500 10y ago
Well an argument you could make is taxing investments makes people less likely to save. Our GDP is basically all comprised of consumption so if a person substituted a consumption good over an investment good could cause a decrease in growth, or cause them to invest in something outside of traditionally taxed investments. No such thing as a perfect way to tax people. Not really for or against more capital gains taxes.
carry_bit 10y ago
Since the capital gains tax isn't indexed to inflation (in the US), you are effectively paying a tax on inflation. Having the rate be lower at least makes thing a bit more fair.
cjlars 10y ago
Inflation isn't deductible, which means that bonds can pay extremely high (real) capital gains rates. If the bond pays 2.5% nominal per year, and inflation is 2% per year, and you pay a 20% capital gains rate, then you make 0.5% in real returns and owe 0.5% in capital gains taxes. Which is a 100% effective tax rate. Stocks are more forgiving, at 2% inflation, plus 8% nominal returns (6% real), and a 20% tax, you would pay 26.7% effective taxes. At 6% inflation, it would be a 40% tax rate. So this all made more sense when taxes were reformed under Reagan, which had a high inflation environment as a backdrop. Realistically, it would probably make more sense to have inflation deductible and progressive, but equal rates for cap gains and labor income. (edit: for full equivalency, you might also need a rebate for capital losses).

jumpman500 10y ago

Well an argument you could make is taxing investments makes people less likely to save. Our GDP is basically all comprised of consumption so if a person substituted a consumption good over an investment good could cause a decrease in growth, or cause them to invest in something outside of traditionally taxed investments. No such thing as a perfect way to tax people. Not really for or against more capital gains taxes.

carry_bit 10y ago

Since the capital gains tax isn't indexed to inflation (in the US), you are effectively paying a tax on inflation. Having the rate be lower at least makes thing a bit more fair.

cjlars 10y ago

Inflation isn't deductible, which means that bonds can pay extremely high (real) capital gains rates. If the bond pays 2.5% nominal per year, and inflation is 2% per year, and you pay a 20% capital gains rate, then you make 0.5% in real returns and owe 0.5% in capital gains taxes. Which is a 100% effective tax rate. Stocks are more forgiving, at 2% inflation, plus 8% nominal returns (6% real), and a 20% tax, you would pay 26.7% effective taxes. At 6% inflation, it would be a 40% tax rate. So this all made more sense when taxes were reformed under Reagan, which had a high inflation environment as a backdrop. Realistically, it would probably make more sense to have inflation deductible and progressive, but equal rates for cap gains and labor income. (edit: for full equivalency, you might also need a rebate for capital losses).