Quote:
Originally Posted by Rekna
I often hear the right clamoring for removing the capital gains tax. I don't understand the logic of this.
A capital gains tax is a tax on money gained through a non-inventory asset. What is the logic for removing this tax? Aren't capital gains a form of income and should be taxed just like income? The big difference I see is that the rich make a lot more money off of capital gains than standard income where the reverse is true for the poor. It seems like removing the capital gains tax would be akin to taxing the poor to give to the rich (the way things were when we had kings).
Can someone please explain this logic to me.
|
If you want to tax capital gains the tax rate has to be reasonable.
There has to be an understanding that there is a theoretical rate that maximizes taxes collected and minimizes unintended consequences. If the goal is in maximizing taxes collected that is one option that needs careful analysis, but even if the intent is punitive or re-distribution of income there is still an optimal rate to accomplish the goal.
So, the first question is what is the point of capital gains tax? Is the point to maximize investment and to spur economic growth. If that is the goal perhaps the rate should be zero. On the other extreme, I am hopeful that we all agree that a rate of 100% is simply foolish.
The trade-off is if the rate is too high people will find alternatives to paying the tax. For example if I own a $5 million office building and I purchased it for $1 million, meaning $4 million is subject to capital gains tax - if the rate is 50% I will owe $2 million in taxes upon sale - if the rate is 15% I owe $600,000 in taxes. If my net profit after tax upon the sale is $2 million, perhaps I take a $4 million loan (80% loan to value) on the property rather than selling. I then have the interest expense on the $4 million dollar loan as an expense, but I can invest $2 million to cover the interest costs. Then I take the other $2 million for whatever purpose I needed it for. The government doesn't get $2 million, it doesn't get $600,000, it doesn't even get the full value of the income earned on the $2 million invested to cover interest expenses. I can also raise rents, keeping the building getting richer as the value goes up.
But do you want to know what happens next, I buy another building. I do the same thing. I do it over and over and over and over...then the market corrects, I default on all those loans...then my banks go to Washington and ask for a bailout.
Don't you just love capitalism, or a system (whatever you want to call it) created with untended consequences?
