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.

Cynthetiq

I've got some money sitting right now. Why should I risk it in a shaky market if there is little payout for me? Make the payout more attractive by giving me a tax break and I'll more than likely be more interested in risking my money in the market instead of holding onto it.

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Baraka_Guru

This might help:

The Taxation of Capital Gains

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Rekna

Except it is just another form of income.

Seems to me that the choices are

1) invest savings and pay 15% tax on profits and thus still gain some money
2) don't invest savings and don't gain any money

There doesn't seem to be any incentive for 2 which people are suggesting.

Cynthetiq

yes, but a person investing in a company provides jobs, which provides wages, sales, other ancilliary tax revenue.

not investing doesn't provides little if any extra, except the interest gain.

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Rekna

Then should we eliminate taxes for business owners also?

Let's say we removed the the capital gains tax. Then say I quit my job and just bought and sold stocks for a living. Would I then not pay any taxes? That doesn't seem very fair.

Baraka_Guru

But you're forgetting that an investor's money is used by the company and is likely taxed somewhere along the way before it's returned as a profit.

The other side of the argument would claim that it's unfair to tax what's already yours. As an investor, your money isn't your work. It's merely your money that you're using to enable others to do their work, to make their own incomes.

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—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

Rekna

That may be but it still seems to me that getting rid of capital gains taxes creates a system in which people can get income without paying any taxes.

For example, a person can flip houses and make lots of money but never pay income tax because it is all capital gains. Sure they pay taxes on consumables but so does everyone else who isn't making capital gains.

Mr Smith

Dividend taxation seems to me a bit like a situation in which a child would have to pay income tax on the allowance it receives from its parents, who already paid tax on their income. I mean, companies pay out dividends after they pay taxes on their net income, isn’t that true? Dividend taxation is double taxation.

Here in Croatia, persons (not companies) don’t have to pay any sort of tax on capital gains. I think that’s OK, not because I pay less taxes but because I somehow think that if paid more tax, that money would go to generally stupid purposes anyway (such as bigger salaries for the huge number of government employees ). You should also ask yourselves where that money goes – Bush’s war in Iraq, perhaps?

pan6467

Ok, so let me get this straight.

If I work hard and decide to save my money, in say, a treasury bill that pays me 5% on my money, and out of that 15% is taken for taxes. Then what is the point in my saving? You're taxing what I am trying to save. You taxed that money when I got paid, you tax that money with sales taxes, with property taxes and so on.

It seems like I am paying more and more in taxes and getting less and less in my returns. You seem to want to keep taxing me.

Seems to me instead of fighting for a capital gains tax, the true fight should be for a flat income tax or sales tax and be done.

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aceventura3

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?

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flstf

People probably pay more in taxes indirectly when they buy goods and services than they would in capital gains taxes if they saved and were taxed on the interest/profit.

Rekna

I think taxing it the same as income tax would be fair. Or maybe say you can get a tax credit toward the capital gains tax equal to your income tax. What I don't want to see is people making money exclusively or primarily off of capital gains and not paying taxes.

In your example you are selling a building but selling that building doesn't create jobs as people have been arguing as a reason to eliminate caital gains tax. Also when people are saying things are double taxed isn't that true for any buisness? If I buy food at a restaurant I pay a tax on it but didn't that restaurant also pay a tax on the ingredients? Does Kinko's pay sales tax on the paper they use?

Also the argument that it stifles job creation is not clear as lots of the tax dollars go directly to job creation (grants, infrastructure, security, etc).

Cynthetiq

No. Businesses that buy products for resale from wholesalers are tax exempt.

Go to Costco and watch the registers for those that have business accounts. They do not pay sales tax on their purchases.

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flstf

They pass the taxes they pay on to you reflected in the prices they charge.

Cynthetiq

That is only if they are the end user of the goods or services... otherwise they why would you constantly do the sales tax shell game?

If they buy a photocopier for the business, they are supposed to pay taxes on the sale.

If they buy a photocopier for resale to customers, they do not pay taxes on the product, When the sale is made they collect the sales taxes, and then pay those to the government.

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flstf

The point of sale, sales tax, is not a good example of what I am talking about. However I believe that most of the taxes paid in the manufacture, distribution, warehousing, shipping etc.. of all components used in the final product are passed down to every company in the distribution chain and wind up in the final price paid by the consumer. Then the customer pays sales tax as well.

Cynthetiq

gotcha. agreed, all the hidden taxes and costs (labor, marketing, real estate) are passed onto the the end user, known as the consumer of the goods or service.

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Rekna

Buying goods for resale is different than buying goods for a manufacturing process. Are goods purchased for manufacturing taxed?

guyy

Labour a hidden "cost" to the end user? The end user did the labour! Where do you think "end users" get the money to buy things?

Since all expenditures are socialised -- to varying degrees to be sure -- the final answer to who pays what depends on the relations of classes.

aceventura3

People with jobs work in buildings, but that aside for now.

If I have a building worth $5 million and I paid $1 million, meaning I have $4 million in capital gains and $5 million in equity assuming no mortgage. If I sit on that equity and those gains, no jobs are created.

However, if I sell and realize the gain (pay reasonable tax on it), and take my equity out - I can spend it or I can re-invest it. If I spend it on cars, boats, travel, restaurants, clothing, jewels, personal trainers, plastic surgery, divorce lawyers, etc. I will go through the money pretty quick and the economy benefits to the tune of me spending $5 million. I have at least in theory created jobs.

If I re-invest it, let's say I build a $7 million building (market value) at a cost of $5 million (cost of construction), I have created jobs based on the labor to have the building constructed.

If I buy an existing building then the person who sold the building has the opportunity to either spend his gains and equity or re-invest it, still creating jobs.

As money, or let's say a single dollar, circulates in the economy there is a "multiplier affect". I earn a dollar and I pay, you to do something, meaning you earn a dollar. Then you pay someone to do something, meaning they earn a dollar. When you introduce a dollar into the economy it has a positive impact. Some call this "supply side economics", whether it is trickle down or trickle up, introducing a dollar in many cases can spur economic growth. In some cases it can be inflationary with no growth, i.e. "stagflation". The opposite is also true. Take a dollar out of the system you can hurt the economy.

So, the question with taxes is: If the government takes a dollar from the economy what are they going to do with it? If the government puts the dollar to some productive use, the impact can be positive. If the government wastes the dollar the impact will be negative.

This leads to the real answer to your question. Who is best able to maximize the return on a dollar in the economy (where everyone benefits), government or private citizens who invest in capital (the types of investments leading to capital gain taxes). Love him or hate him, Bill Gates when he started Microsoft probably did more for the economy with his investments creating Microsoft than the government could have. However, when the government created the Interstate Highway system or perhaps our investment in space exploration, that money was put to very good use, perhaps exceeding what would have been done by the private sector. In most cases I would side with privates citizens getting a better return and benefiting more people than government. Hence, I support lower capital gains taxes.



Ultimately consumers pay all taxes. Corporations as much as possible will earn a competetive return on investment and increased costs are passed on.

Again, it depends on how much waste you have in government. For example if my sister is unemployed and I give her $1 for food, she gets $1 for food. If the dollar is taxed and the government gives my sister $.50, in theory there is 50% waste. So, the question is what happened to the other $.50? If the government used it in a manner that is productive, all is good. If not, i.e. "pork" projects, no one or only a few benefit - waste.

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flstf

As I recall working for an OEM (original equipment manufacturer) we did not have to pay sales taxes for items purchased and included in our final products for resale. I think we did pay sales taxes on computers, office equipment, tools, etc.. that are required but not resold. The cost for these items along with the taxes were of course included in our overhead calculations and passed on to our customers.

It is probably more accurate to say that all goods contain in their price the local, state and federal (sometimes international) taxes paid by every company of every component and service used in the manufacturing process. There are so many taxes in the distribution chain that it would be difficult to list, probably dozens maybe hundreds, and each item has a different tax history. Then the manufacturer adds their taxes and passes on the cost to the retailer who adds their taxes and passes on the cost to the consumer who pays sales tax based on the price of the item.

jorgelito

I agree with this. We need tax reform immediately. I am taxed to death I no longer feel like working anymore. What's the point. Over 40% of my income is taxed. Give me a break. Flat tax is the only tax that is not regressive or progressive. Simple.

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