# Can anyone defend taxing Capital Gains at only 15%? **URL:** \ **Category:** Great Debates\ **Created:** [October 27, 2010, 5:17pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555 "2010-10-27T17:17:11Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [October 27, 2010, 8:34pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/21 "2010-10-27T20:34:12Z")
> [@Olfatbut](#): > > Maybe capital investment should be incentivized, but this policy reflects an idealized version of capital investment where you help a company get on its feet, then share in its profits. That’s called “Buy and hold” and these days seems to be a sucker’s game. Derivatives (short-term bets on an asset’s future value, not necessarily higher) seem to be where the smart money is. > > If you buy or short a put/call on a stock, the underlying company doesn’t get to invest the money you put in. If you win, yay for you, if you lose it goes to the house. That doesn’t sound like capital investment to me, so I guess I lean more towards the cynical version of your explanation 🙂 Those calls and puts are hedged by shares of stock, that’s why buying 100 call contracts will move the stock price. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [October 27, 2010, 8:38pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/22 "2010-10-27T20:38:11Z")
> [@Olfatbut](#): > > Self-check, just realized that derivatives would usually be short-term cap gains, taxed as income… though the short-term churn might be hidden behind shares in hedge-funds or banks that are long-term holdings. I am at the end of my knowledge here, hoping someone smarter comes along to carry the torch. Most hedge funds are partnerships or some other passthrough vehicle. This means the character of the income is passed on to the investor. What happens is that the hedge fund engages in financial transactions to convert their short term capital gains into long term capital gains. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [October 27, 2010, 8:40pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/23 "2010-10-27T20:40:55Z")
> [@emacknight](#): > > If you’re talking about buying and selling options, that’s still part of the stock system. Options are available based on shares that someone already owns. And is essentially a way of transferring some of the risk in exchange for some of the rewards. Not really true. I can sell naked call options or naked put options. I don’t need the reciprocal position to sell those options. This risk can be created out of whole cloth. The open interest on a stock is ferquently greater than the entire float. ---
**Author:** ![Dangerosa](https://avatars.discourse-cdn.com/v4/letter/d/22d042/32.png) [@Dangerosa](https://boards.straightdope.com/u/Dangerosa)\ **Post date:** [October 27, 2010, 8:42pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/24 "2010-10-27T20:42:29Z")
There is a time value of money component as well - you loose money on long term capital gains because you have it tied up for longer. Granted, with LTCG kicking in after a year, that argument isn’t valid - but it IS a good one when I’ve held my Disney stock for 12 years and sell it for a 20% gain. Inflation ate away all that gain - and then you tax it at 36% - are you TRYING to get me to not invest? If I were setting tax policy, I’d index long term capital gains rates to inflation based off the time the stock was held. This would have been a nightmare 20 years ago, but people who buy stock aren’t doing their taxes by hand and looking up rates in a table anyway. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [October 27, 2010, 8:45pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/25 "2010-10-27T20:45:50Z")
> [@Gangster\_Octopus](#): > > It’s all about liquidity and encouraging investment. The higher the tax rate the less likely folks are to invest and the less likely folks are to move their capital to better projects. If you own a stock that is getting you 0% return, you would not move that capital out until you found something getting you a 15% return (very simpified) so the higher the tax rate the less likely folks are to re-invest. Any tax would create this inefficeincy. But taxes are necessary for a working society so it has been collectively decided thourhg our representative government that a rate lower than the marginal rate is appropriate. A 15% capital gains rate does not require a 15% rate of return. A 15% capital gains rate merely reduces your after tax return by 15% so if you are looking for an after tax return of 8.5% you need something that will provide you with a 10% pre-tax return. So some marginal investments do not get made because the tax on the income reduces the anticipated profit by enough to amke it unattractive. If capital gains were treated as ordinary income, people would demand higher rates of return from their investments and some investments would not get made. Oddly this might lead to MORE risk taking. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [October 27, 2010, 8:47pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/26 "2010-10-27T20:47:06Z")
> [@emacknight](#): > > Good point, but there is a limit to how much you can use to offset other income. > > And then there is that freakin wash-sale rule. Oh how I loath the wash-sale rule. $3000/year Wel most brokerages do all those calculations for you unless you trade the same security in different accounts. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [October 27, 2010, 8:49pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/27 "2010-10-27T20:49:11Z")
> [@Tom\_Tildrum](#): > > Investors generally have some level of choice as to whether to sell an asset (and realize the capital gain) or hold it. The higher the capital-gains rate, the greater the incentive to hold their assets and not realize the gain. This means that at some point, increasing the rate is going to decrease the overall amount of tax collected. > > I have no idea whether 15% is the optimal rate or whether it should be higher, but it is probably true that investors have more leeway over whether to realize their gains than wage-earners have over whether to earn a salary or not, so it’s not unreasonable to think that the revenue-maximizing rate for capital gains would be less than it would be for wage income. From a tax equity perspective it is horrible. From an econmic efficiency perspective, there is no reason why a 15% capital gains rate is more important than a 15% earned income tax rate. Why is it so much mroe important to relive taxation of investment income over earned income? ---
**Author:** ![Tom\_Tildrum](https://avatars.discourse-cdn.com/v4/letter/t/e95f7d/32.png) [@Tom\_Tildrum](https://boards.straightdope.com/u/Tom_Tildrum)\ **Post date:** [October 27, 2010, 9:44pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/28 "2010-10-27T21:44:34Z")
> [@Damuri\_Ajashi](#): > > From a tax equity perspective it is horrible. From an econmic efficiency perspective, there is no reason why a 15% capital gains rate is more important than a 15% earned income tax rate. Why is it so much mroe important to relive taxation of investment income over earned income? In order to maximize tax revenue (at least in theory). ---
**Author:** ![iamthewalrus\_3](https://avatars.discourse-cdn.com/v4/letter/i/258eb7/32.png) [@iamthewalrus\_3](https://boards.straightdope.com/u/iamthewalrus_3)\ **Post date:** [October 27, 2010, 10:13pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/29 "2010-10-27T22:13:47Z")
> [@Dangerosa](#): > > If I were setting tax policy, I’d index long term capital gains rates to inflation based off the time the stock was held. This would have been a nightmare 20 years ago, but people who buy stock aren’t doing their taxes by hand and looking up rates in a table anyway. Or just tax real gains, rather than nominal gains. That’s simple enough that diehards like me who still do their taxes by hand could do the calculation easily. ---
**Author:** ![Chronos](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/chronos/32/134_2.png) [@Chronos](https://boards.straightdope.com/u/Chronos)\ **Post date:** [October 27, 2010, 10:49pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/30 "2010-10-27T22:49:49Z")
The risk argument doesn’t hold water. Sure, if I make a bold entrepreneurial investment in some promising start-up, I’m taking a big risk, and yes, there’s the chance that I might lose it all. But if that happens, the tax rate is irrelevant, because I haven’t realized any capital gains. It’s only if the investment is successful that the tax kicks in-- It won’t ruin anyone. And then there’s the fact that if an investment does fail, it’s suddenly considered normal income again, and counts as a deduction under the normal income tax rates. Once you’ve got that asymmetry there, you’re just asking for people to game the system. ---
**Author:** ![Gangster\_Octopus](https://avatars.discourse-cdn.com/v4/letter/g/a8b319/32.png) [@Gangster\_Octopus](https://boards.straightdope.com/u/Gangster_Octopus)\ **Post date:** [October 27, 2010, 10:59pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/31 "2010-10-27T22:59:17Z")
> [@Damuri\_Ajashi](#): > > From a tax equity perspective it is horrible. From an econmic efficiency perspective, there is no reason why a 15% capital gains rate is more important than a 15% earned income tax rate. Why is it so much mroe important to relive taxation of investment income over earned income? The biggest differnce is that earned income is paid out as it accumulates, but investment income is only paid out when you cash out. It is known as the lock-in effect and the higher the costs to cashing out the less likely folks are to cash out. Ideally there would be a “wealth tax” that taxed the value of your assets as opposed to just realized gains, but administratively that can be very difficult. ---
**Author:** ![Gangster\_Octopus](https://avatars.discourse-cdn.com/v4/letter/g/a8b319/32.png) [@Gangster\_Octopus](https://boards.straightdope.com/u/Gangster_Octopus)\ **Post date:** [October 27, 2010, 11:01pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/32 "2010-10-27T23:01:11Z")
> [@Damuri\_Ajashi](#): > > A 15% capital gains rate does not require a 15% rate of return. A 15% capital gains rate merely reduces your after tax return by 15% so if you are looking for an after tax return of 8.5% you need something that will provide you with a 10% pre-tax return. So some marginal investments do not get made because the tax on the income reduces the anticipated profit by enough to amke it unattractive. You are absolutely right about the details on the math there, I was far too loose and off the cuff about it. But the point is the same, the higher the capital gains tax the less likely capital can move to more econoic resources. ---
**Author:** ![emacknight](https://avatars.discourse-cdn.com/v4/letter/e/3ec8ea/32.png) [@emacknight](https://boards.straightdope.com/u/emacknight)\ **Post date:** [October 27, 2010, 11:18pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/33 "2010-10-27T23:18:30Z")
> [@Chronos](#): > > The risk argument doesn’t hold water. Sure, if I make a bold entrepreneurial investment in some promising start-up, I’m taking a big risk, and yes, there’s the chance that I might lose it all. But if that happens, the tax rate is irrelevant, because I haven’t realized any capital gains. It’s only if the investment is successful that the tax kicks in-- It won’t ruin anyone. > > And then there’s the fact that if an investment does fail, it’s suddenly considered normal income again, and counts as a deduction under the normal income tax rates. Once you’ve got that asymmetry there, you’re just asking for people to game the system. It actually holds quite a bit of water. If you sit down at a blackjack table, and bet $10 in chips, you know that if you win you’ll have $20, if you lose it’s all gone. Would people be as willing to play if the odds were the same by they only got $15 back on a win, but still stood to lose it all? ---
**Author:** ![foolsguinea](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foolsguinea/32/14751_2.png) [@foolsguinea](https://boards.straightdope.com/u/foolsguinea)\ **Post date:** [October 27, 2010, 11:37pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/34 "2010-10-27T23:37:48Z")
How about this: Tax real gains, as iamthewalrus(:3= said, & further allow investors to divide their gains by the number of years the investment was held–then tax as normal income, _presto._ ---
**Author:** ![Desert\_Nomad](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/desert_nomad/32/177_2.png) [@Desert\_Nomad](https://boards.straightdope.com/u/Desert_Nomad)\ **Post date:** [October 27, 2010, 11:39pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/35 "2010-10-27T23:39:59Z")
Personally, I think the capital gains tax should be zero. Why tax investment? Tax consumption. a 15% sales tax and no income tax would be a much more economically sound system. Hong Kong has no capital gains tax and over the past 50 years has been one of the best examples of successful capitalism in the world. ---
**Author:** ![foolsguinea](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foolsguinea/32/14751_2.png) [@foolsguinea](https://boards.straightdope.com/u/foolsguinea)\ **Post date:** [October 27, 2010, 11:43pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/36 "2010-10-27T23:43:07Z")
> [@emacknight](#): > > It actually holds quite a bit of water. > > If you sit down at a blackjack table, and bet $10 in chips, you know that if you win you’ll have $20, if you lose it’s all gone. > > Would people be as willing to play if the odds were the same by they only got $15 back on a win, but still stood to lose it all? Ooh boy. Well, I would think in the interest of–for want of a better term–“fairness,” any capital gains tax should apply to losses–that is, a 15% capital gains tax should mean a 15% negative income tax (or refund) for capital losses. Otherwise there’s an advantage to the government for some investors to win big–paying the full tax rate–while others lose big, but cost the government nothing. And I don’t think we should encourage _that._ ---
**Author:** ![foolsguinea](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foolsguinea/32/14751_2.png) [@foolsguinea](https://boards.straightdope.com/u/foolsguinea)\ **Post date:** [October 27, 2010, 11:47pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/37 "2010-10-27T23:47:25Z")
> [@Desert\_Nomad](#): > > Personally, I think the capital gains tax should be zero. Why tax investment? Tax consumption. a 15% sales tax and no income tax would be a much more economically sound system. Hong Kong has no capital gains tax and over the past 50 years has been one of the best examples of successful capitalism in the world. :dubious: [http://en.allexperts.com/q/China-Hong-Kong-191/hong-kong-pay-living.htm](http://en.allexperts.com/q/China-Hong-Kong-191/hong-kong-pay-living.htm) Hong Kong has an income tax, not a consumption tax base. ---
**Author:** ![Chronos](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/chronos/32/134_2.png) [@Chronos](https://boards.straightdope.com/u/Chronos)\ **Post date:** [October 27, 2010, 11:51pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/38 "2010-10-27T23:51:58Z")
> [@](#): > > It is known as the lock-in effect and the higher the costs to cashing out the less likely folks are to cash out. Well, good. Isn’t the whole point supposed to be to encourage investment? But someone cashing out is doing the opposite of investment. So we keep the capital gains rate high, to lock them in and encourage them to keep investing. ---
**Author:** ![Olfatbut](https://avatars.discourse-cdn.com/v4/letter/o/a183cd/32.png) [@Olfatbut](https://boards.straightdope.com/u/Olfatbut)\ **Post date:** [October 27, 2010, 11:59pm UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/39 "2010-10-27T23:59:50Z")
Well this is a pretty heady discussion by my standards. Let me see if I have this right. In 2011 LTG will go from 15% to 20%. STG will still be treated as ordinary income. The difference between LTG and STG will shrink, making speculation (ST) relatively more attractive compared to investing (LT). There is a tradeoff between liquidity/efficiency and volatility, and increased speculation will fuel volatility in the market. The average stock holding period on the NYSE in 2007 was 7 months ([cite](http://topforeignstocks.com/2010/09/06/duration-of-stock-holding-period-continues-to-fall-globally/) ) and is probably less by now. With computerized trading it is often minutes or seconds. So it’s tempting to conclude that we have too much volatility already, that increasing the LTCG is the wrong way to go, that increasing STCG would achieve a healthier result by encouraging longer term investing and reducing volatility. But then there’s this (Thanks Damuri for your insights): > [@](#): > > Most hedge funds are partnerships or some other passthrough vehicle. This means the character of the income is passed on to the investor. What happens is that the hedge fund engages in financial transactions to convert their short term capital gains into long term capital gains. So all those quick trades that banks are churning all the time end up getting taxed as LTCG? Meanwhile the individual small-investor tinkerers get stuck paying the STCG. I know a lot of them (I was one for years until I pulled the rip cord) and it’s extremely rare to hold a stock for a whole year. That’s kind of annoying, just on a personal level. It would be nice to separate actual (useful) capital investment from money machines that continually move money between different piles based on tiny movements in stock price. I thought that’s what LT/ST CG was supposed to do but if so it’s broken. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [October 28, 2010, 3:29am UTC](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555/40 "2010-10-28T03:29:09Z")
> [@Dangerosa](#): > > There is a time value of money component as well - you loose money on long term capital gains because you have it tied up for longer. Granted, with LTCG kicking in after a year, that argument isn’t valid - but it IS a good one when I’ve held my Disney stock for 12 years and sell it for a 20% gain. Inflation ate away all that gain - and then you tax it at 36% - are you TRYING to get me to not invest? > > If I were setting tax policy, I’d index long term capital gains rates to inflation based off the time the stock was held. This would have been a nightmare 20 years ago, but people who buy stock aren’t doing their taxes by hand and looking up rates in a table anyway. Then why do we tax ALL of your interest instead of only that portion of interest in excess of inflation. You sat on an investment that wasn’t beating inflation. [Previous page](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555.md?page=1) [Next page](https://boards.straightdope.com/t/can-anyone-defend-taxing-capital-gains-at-only-15/558555.md?page=3)