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Capital Gains Tax - Need to Understand

Discussion in 'Fred's House of Pancakes' started by FL_Prius_Driver, May 1, 2012.

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  1. FL_Prius_Driver

    FL_Prius_Driver Senior Member

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    [Note - Not a political thread.]

    Can someone tell me why long term capital gains are taxed at a lower rate? As far as I can tell it's simply a mechanism for those with a lot of money to make money faster than those without the same starting amounts.....everything else being the same.
  2. icarus

    icarus Senior Member

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    Perhaps a more interesting question is,, why is capital gain (and dividend and interest income for that matter) taxed at a lower rate than earned income? Why is it not also taxed for social security and Medicare taxes?

    The hint of an answer is of course, a generation of tax policy that diroportionatly favours capital over labor, with the net result being a inexorable transfer of wealth from the many to the few.

    Icarus

    PS. If you don't think it political, I am afraid you are niave.
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  3. davesrose

    davesrose Active Member

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    Tax laws are never simple. I've been self employed for several years: so I get to pay more in social security tax then a wage earner. The other aspect about this question is that social security tax is collected up to $106,800 of earned income: if you're in a higher bracket, then your extra income is not taxed. Capital gains, though, is one of the lowest rates that I'm aware of....I'm planning on keeping all of my investments for as long as possible.
  4. FL_Prius_Driver

    FL_Prius_Driver Senior Member

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    I'm not niave, just naive. (humor). It's an economic question I'm asking.
  5. FL_Prius_Driver

    FL_Prius_Driver Senior Member

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    The question is why so much lower than other taxes? One area of more agreement than usual is that our tax code is broken....but how and where. Why the big difference in rates here?

    (Raising or lowering is a different subject, so that's not my initial objective to discuss.)
  6. icarus

    icarus Senior Member

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    The argument I often hear is, that if you tax capital then people won't invest. An argument that I think specious, as evidence by investment rates over time compared to capital tax rates.

    Icarus
  7. lamebums

    lamebums Member

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    Hi FL_Prius_Driver--

    The argument in favor of having capital gains taxed at a lower rate (if at all) is because any accumulated capital, as the product of one's labor, has already been subjected to taxation once - effectively, you're being taxed twice on the money if you (1) make it in the first place, and then (2) dare to use it to make more money.

    I think that's crap. Although I'll frequently demand Warren Buffet put his money where his mouth is and send a check to the United States Treasury every year to bring his effective tax rate up to 30%, the most effective solution is:

    • Abolish the current "capital gains" tax as we know it
    • Count any capital gains as fresh income, subjecting it to income taxation.
    • Count capital losses as an adjustment to taxable income, which would have helped mitigated the damage when everyone's 401k's were crushed in the market crash


    This would allow Obama's millionaires and billionaires to pay a higher tax rate on their income, while allowing the little guy to invest his money at a comparable rate (the current tax brackets are 10, 15, 20 if I recall correctly?). Since the billionaires are chipping in more now, then they could use that revenue to pay down the debt - or Lord forbid - use the money to cut the working man's taxes.
  8. davesrose

    davesrose Active Member

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    You first said this shouldn't be a poltical thread: I can only see this being a rhetorical question. Tax codes are quite political. If we look at the last times capital gains were lowered, it seems as though it's the consistant tax cut chip that gets thrown in the poker game that politicians bid with.
  9. xs650

    xs650 Senior Member

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    Long term is taxed at a lower rate to encourage longer term investments in place of playing the market like a casino.
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  10. ETC(SS)

    ETC(SS) Aspiring Hypocommuter.

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    You're never going to get an apolitical answer to a tax question.
    Personally, I'm a semi-flat taxer.
    Granted, I'm as hypocritical as all human beings, but to me it seems only fair that we abolish all tax breaks, exemptions, exclusions, etc....and tax all income.
    Period.

    It won't solve the underlying problem, even if you could get the politicians to sign off on it because the government will spend past zero no matter how much money you throw into the pot.
    However (comma!) it would end a lot of people screaming about wanting more tax breaks for their sacred cows (example: EVs) while shrieking about other people's tax breaks.

    Doesn't matter though.
    It ain't gonna happen!
    Maybe when the EU finishes imploding they'll buy a vowel and solve the puzzle, but for right now all the folks in D.C. are just worried about either getting elected, re-elected, or in the case of the zillions of government employees, they're just worried about burrowing in deeply enough not to get RIF'd.
  11. daniel

    daniel Cat Lovers Against the Bomb

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    The answer is that there is no answer. It's just the way the tax code was written. Of course, on another level, the answer is politics: I'd say the reason capital gains are taxed at a lower rate is to favor the rich.

    A related question would be, "Why is interest on most municipal bonds federally tax free?" The answer: It allows cities to borrow money cheaper. But it really just means that the federal government is transferring money to cities via investors in muni bonds. But since it's tied to your marginal tax rate, again it favors the rich.

    Both questions are intimately political, because the tax code is written by politicians, for political reasons, and through the political process.
  12. spiderman

    spiderman wretched

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    lol
  13. FL_Prius_Driver

    FL_Prius_Driver Senior Member

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    That's the type of feedback I'm looking for. Thanks greatly.
  14. FL_Prius_Driver

    FL_Prius_Driver Senior Member

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    But even the politicians have to use an economic justification of some type, however valid or bogus. Those valid/bogus justifications are what I'm after at this first stage.
  15. FL_Prius_Driver

    FL_Prius_Driver Senior Member

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    Understandable logic. Any further elaborations welcome. For example, what is wrong with playing the market (like a casino). Isn't that what the market is for?
  16. FL_Prius_Driver

    FL_Prius_Driver Senior Member

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    I'm not sure. We have a lot of smart folks that can clearly see that I'm trying to dig under the surface of the "talking-point" responses of both parties. Nearly all of them, including you(!), are capable of providing unique insights.
  17. FL_Prius_Driver

    FL_Prius_Driver Senior Member

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    Your answer has some of the elements I'm looking for. Nobody on this thread is wanting or claiming that politics is not involved. But even with politics we could come out with bills having long term capital gains with different "rates". Let's say three bills with rates 2%, 15% and 25% lower than ordinary income rates. What would be the overall economic effect of each one being selected?
  18. wjtracy

    wjtracy Senior Member

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    Although taxes are by definition arbitrary, the standard traditional US long term capital gain tax credits have made sense for many years, to encourage long term investments. What is a little more questionable are the current non-traditonal cap gain tax rates (the so-called Bush era tax cuts) which lowered cap gains taxes below traditional values and even gives tax credit for short-term dividend income from stocks.
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  19. Flyman

    Flyman New Member

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    when you raise capital gain taxes at least long term gains, you not only get the big guy you also get the small guy trying to make money. My wife, her parents and I owned 4- 3 bdrm duplexes, a 3 bdrm single residence and 5 2 bdrm townhouses on a 7 acre piece of land. My wife and I lived in one side of a duplex and managed the rentals for the last 8 years we owned them. We kept new carpeting and appliances in all of them, kept them painted inside and out, all of the lawns mowed, did 90% of all the repairs and remodeling and we both had fulltime jobs as did her parents.
    For anyone who has done this they know just how hard it is to do and the hours and hours of work involved. Constantly worrying about keeping them full and making the mortgage payments going to court with the few bad tenants we had. Thank God or ? that we are in WA and not CA where the Renter has all the rights and the landlord few.
    After Twenty years, the State and the Federal Government made as much or more than we did. Each family cleared about $130,000, not much for twenty years of blood, sweat and tears, of which there were a lot of each. Where is the "FAIRNESS" in this? Or for that matter in the fact that 40% plus pay no Federal income tax and some even get a refund of money they never paid in the first place.
  20. FL_Prius_Driver

    FL_Prius_Driver Senior Member

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    In this case, why does the government need to encourage long term investments? Is that a talking point, a myth, an established economic principle..... or does the government see more tax revenue by doing so?
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