Big Iron wrote:
(in http://www.straightdope.com/ubb/Forum1/HTML/000013.html )
I don’t really understand what the capital gains tax is all about and why it’s such a big issue to so many people. Could you guys please explain it to me? Pros, cons, and all that. Thanks!
Oy, don’t get me started! In a nutshell, the notion that “capital gains” should escape the taxation visited on money earned by actually working for it is, at best, a loopy Republican version of the dreaded “industrial policy”, and, at worst, a naked ploy for the wealthy to avoid paying their fair share of taxes. It can really get wiggy, I’ll tell you – your best hope is that some Arg-like true believer will stumble in here and give you a taste of some of the zany and rarified thinking that some bring to this issue.
Anyway, to get you up to speed on the fundamentals, a “capital gain” is what you realize (tax term) when you sell some asset for more than you paid for it. Stock and real estate are the two primary sorts of investments that result in capital gains. When you buy a capital asset, the price you paid is your “basis.” If you sell it for more, then your capital gain is the difference between the sale price and the purchase price (i.e., your basis). That amount is considered income for purposes of federal income taxation (although, as noted, it is now taxed at a more favorable rate than “ordinary income,” i.e., wages, interest income).
OK. Merchants, who make their living by selling things for more than they paid for them, get taxed at the normal rate right? But someone who has another job but just happens to rake in a lot of cash by buying and selling real estate or stocks, gets taxed at a lower rate for those? That doesn’t seem fair. What about people whose entire career is buying houses just to fix them up and sell them, what rate do they get taxed at and why?
I’m sorry, I’m probably sounding like a complete moron…I’m not, I had a 3.7 in college, honestly! I just slept through economics class 
The one thing I’d like to see capital gains taxes adjusted for is inflation.
Let’s say I hold a stock for 3 years and sell it for a profit of 5%. I get taxed on that difference. But it doesn’t recognize the fact that inflation has gone up that same 5% in that time period (this is a hypothetical example – I’m making up numbers). So I’ve just gotten taxed for making no money.
What bugs me about capital gains taxes is that you can only deduct $3000 a year for losses. For instance, if I sold all my Apple stock at a gain of $30,000 in 1997, I have to claim all the proceeds of that sale as a capital gain. If I then re-invest all that dough in some loser stock, and sell it in 1998 at a huge loss, I can only write off $3 grand a year. What a bite!
Besides, the government should be encouraging us to invest our money, so we can support ourselves in our old age. They should be giving us tax breaks for making fiscally responsible decisions, instead of blowing it on drugs, sex and rock 'n roll.
A profit is a profit! If you made money on the investmeny you should pay the taxes on it. Look at demographics. It’s not the working poor who are making investments. Most of us are struggling to get by. Its the new or old rich who are making money, as it has alwys been. Tax the fuck out of them. They’re making money out of our work and they don’t do a thing.
[[The one thing I’d like to see capital gains taxes adjusted for is inflation.
Let’s say I hold a stock for 3 years and sell it for a profit of 5%. I get taxed on that difference. But it doesn’t recognize the fact that inflation has gone up that same 5% in that time period (this is a hypothetical example – I’m making up numbers). So I’ve just gotten taxed for making no money.]] Dave B.
Well, you made money, I think, it just isn’t worth as much as it was – similar to your wages over that time period, and identical to interest income.
[[What bugs me about capital gains taxes is that you can only deduct $3000 a year for losses. For instance, if I sold all my Apple stock at a gain of $30,000 in 1997, I have to claim all the proceeds of that sale as a capital gain. If I then re-invest all that dough in some loser stock, and sell it in 1998 at a huge loss, I can only write off $3 grand a year. What a bite!]] PunditLisa
Well, you can carry capital losses over for several years (and, of course, fully apply them to offset any other capital gains over that period).
[[Besides, the government should be encouraging us to invest our money, so we can support ourselves in our old age. They should be giving us tax breaks for making fiscally responsible decisions, instead of blowing it on drugs, sex and rock 'n roll.]]
Shouldn’t the government equally be encouraging us to work?
By taxing us at a rate of 28 cents on the dollar!? Our forefathers would have dumped every member of Congress in the Atlantic Ocean before they would have paid the income tax rate that the average American worker pays today.
So, yes the government should be encouraging everyone to work AND to wisely invest their money. At least they did away with the credit card interest write-off…
One of the reasons the capital gains rate is necessary is for very long term investments such as timber. Society benefits from the investment in timber in many monetary and nonmonetary ways. Planting trees or keeping land in trees provides society wildlife habitat, soil protection, air quality protection and water quality protection. Most forest landowners are small landowner who have less than 100 acres of forestland and who generally inherit their land. Most of them are not rich by anyone’s standards.
Even when landowners use intensive management on land in the South (where trees grow faster) the first time you can get any return is the first thinning which can be from age 12 to age 25 or even later.
You can deduct your initial investment from the proceeds of selling your timber–but this figure is not indexed for inflation. You can use tax credits and accelerated amortization to recover costs of reforestation–but this has only been available for the past few years. So you have a situation where a middle income or low income person scraped up the money to invest in reforestation, society reaps environmental benefits and gets the use of a renewable resource and they get taxed at ordinary income rates??
Capital gains encourage people to take risks which benefit all of us. In areas where timber grows slowly, the rate of return would be so low with ordinary income tax rates that you would be a fool to invest in reforestation rather than in stocks. In addition, due to the stupid rules on casualty losses of timber–the risk of financial loss is pretty high.
We reap the benefits of investment in timber for our use of this renewable resource as well–wood for houses, furniture, etc. Paper is made from thinned wood and from the byproducts of lumber manufacturing. Alternatives for lumber are nonrenewable and more damaging to the environment. Using annual crops for paper manufacturing means annual soil losses equivalent to that of other agricultural production. Studies have shown that soil erosion following a timber sale generally stop within a few months of the sale (even sooner if the timber sale is in the spring or summer when native plants spring up within days after the soil is disturbed). Good logging practices which are being required and used these days will limit the major cause of erosion during timber harvesting which is poor road construction.
I wouldn’t mind a higher overall tax rate on the wealthy. But, capital gains is necessary to encourage investment in truly long-term investments like timber.
Al G said:
Yeah, only the rich invest money. Lord knows nobody else buys a house, puts money in mutual funds or the occasional stock, etc. Must only be the rich!
Checked Al G’s profile…“not available” – with those views, it would worry me if it came up Tennessee. 
It always chafes me when I hear people refer to capital gains as only playthings for the rich. Until this year, I never made more than $30,000. (And being single, I get squat for tax deductions). I own stock. I have mutual funds. I’m going to be in the market for buying a house soon. I’m not rich, and any tax breaks will benefit me.
It’s a shame the way money is taxed over and over again. Make $30,000 and the income is taxed (Federal, state, and county). Want to spend some of it, and it is taxed. Want to invest it, and gains are taxed. And if you happen to die with some left over, it is taxed yet again.
I say again, I’m not rich, and tax cuts will benefit me. Maybe that is a selfish attitude, but I’m not the one griping if someone making more than me gets a tax break also.
But Divemaster, if you invest money, and get more money back, why should that additional money not get taxed just like income does? You’re not getting taxed again on the original money, but on the money you made.
Basically, by eliminating the capital gains tax, you’d be saying, “Some income is income and some income is not income.” You’d also be saying that income you don’t really “earn” (in the sense of wages) is worth more than income that you do.
pldennison–
I would not have so much of a problem with being taxed on capital gains if they were indexed for inflation. That had been mentioned in previous posts, so I didn’t really go into it. But I think it would soothe a lot of feathers.
Maybe in these days of almost non-existent inflation it doesn’t seem like a big deal, but a 10% annual return doesn’t look too good if inflation creeps back up to 7-8% (or even higher).
Plus, I think it would be for the best if people would stop couching the issue in an “us” vs. “them” (rich bastards; tax the fuck out of them) debate. A lot of “us” have investments too.
{{[[What bugs me about capital gains taxes is that you can only deduct $3000 a year for losses. For instance, if I sold all my Apple stock at a gain of $30,000 in 1997, I have to claim all the proceeds of that sale as a capital gain. If I then re-invest all that dough in some loser stock, and sell it in 1998 at a huge loss, I can only write off $3 grand a year. What a bite!]] PunditLisa
Well, you can carry capital losses over for several years (and, of course, fully apply them to offset any other capital gains over that period).}} Moi
I should also add that, without a limit on applying capital losses to other income, the tax code would be susceptible to rank manipulation by wealthy types who could effectively keep making tons of money and yet pay no taxes. It is relatively easy for people to arrange their finances so as to have large paper losses year after year. This is the essence of the classic tax shelter – a basic element is to move up losses and push back gains. Capital gains/losses allow you to do this because you can choose when to take the gain or loss.
[[“Shouldn’t the government equally be encouraging us to work?”
By taxing us at a rate of 28 cents on the dollar!? Our forefathers would have dumped every member of Congress in the Atlantic Ocean before they would have paid the income tax rate that the average American worker pays today. ]] PinditLisa
First of all, Lisa, you should be aware that Americans are about the most lightly taxed developed country in the world. Second, my point was that, by granting favorable treatment of investment income, you effectively penalize wage income, which, in effect, is to discourage work.
[[So, yes the government should be encouraging everyone to work AND to wisely invest their money. At least they did away with the credit card interest write-off…]]
Yup – and the best way to do that is to tax all income at the same rate, leaving the tax code as neutral as possible.
[[One of the reasons the capital gains rate is necessary is for very long term investments such as timber. Society benefits from the investment in timber in many monetary and nonmonetary ways. Planting trees or keeping land in trees provides society wildlife habitat, soil protection, air quality protection and water quality protection. ]] smiling jaws
This is one of the zany sort of rationalizations I was referring to earlier.
[[Most forest landowners are small landowner who have less than 100 acres of forestland and who generally inherit their land. Most of them are not rich by anyone’s standards.
Even when landowners use intensive management on land in the South (where trees grow faster) the first time you can get any return is the first thinning which can be from age 12 to age 25 or even later.
You can deduct your initial investment from the proceeds of selling your timber–but this figure is not indexed for inflation.]]
No, nor is any other kind of income (and inflation has not been much of a problem lately). Meanwhile, unlike other forms of income, the appreciation in value is allowed to accumulate over time without being taxed.
[[ You can use tax credits and accelerated amortization to recover costs of reforestation–but this has only been available for the past few years. So you have a situation where a middle income or low income person scraped up the money to invest in reforestation, society reaps environmental benefits and gets the use of a renewable resource and they get taxed at ordinary income rates?? ]]
We are relying, as a society, on the investments of low and “modest” income people in reforestation? I don’t think so, to put it mildly. It’s income, just like any other kind of income (excpet that it’s inherently getting more favorable treatment because you get to choose when you take it, by and large).
[[Capital gains encourage people to take risks which benefit all of us.]]
Yup – of course, the payoff from working and investing in non-capital things likewise benefits society. There is no good reason to think that capital investments are preferable.
[[ In areas where timber grows slowly, the rate of return would be so low with ordinary income tax rates that you would be a fool to invest in reforestation rather than in stocks. ]]
Fine – let us pursue a more rational environmental policy.
[[In addition, due to the stupid rules on casualty losses of timber–the risk of financial loss is pretty high.
We reap the benefits of investment in timber for our use of this renewable resource as well–wood for houses, furniture, etc. Paper is made from thinned wood and from the byproducts of lumber manufacturing. Alternatives for lumber are nonrenewable and more damaging to the environment. Using annual crops for paper manufacturing means annual soil losses equivalent to that of other agricultural production. Studies have shown that soil erosion following a timber sale generally stop within a few months of the sale (even sooner if the timber sale is in the spring or summer when native plants spring up within days after the soil is disturbed). Good logging practices which are being required and used these days will limit the major cause of erosion during timber harvesting which is poor road construction.
I wouldn’t mind a higher overall tax rate on the wealthy. But, capital gains is necessary to encourage investment in truly long-term investments like timber.]]
You wouldn’t happen to be in the timber biz, eh?
[[“It’s not the working poor who are making investments. Most of us are struggling to get by. Its the new or old rich who are making money, as it has alwys been. Tax the fuck out of them. They’re making money out of our work and they don’t do a thing.”
Yeah, only the rich invest money. Lord knows nobody else buys a house, puts money in mutual funds or the occasional stock, etc. Must only be the rich! ]] David B.
Nevertheless, the fact is that excluding capital gains from taxation (or taxing it at a lower rate) favors the wealthier in a grossly disproportionate way.
[[It always chafes me when I hear people refer to capital gains as only playthings for the rich. Until this year, I never made more than $30,000. (And being single, I get squat for tax deductions). I own stock. I have mutual funds. I’m going to be in the market for buying a house soon. I’m not rich, and any tax breaks will benefit me.]] DiveMaster
On balance? I’d be really surprised.
[[It’s a shame the way money is taxed over and over again. Make $30,000 and the income is taxed (Federal, state, and county). Want to spend some of it, and it is taxed. Want to invest it, and gains are taxed. And if you happen to die with some left over, it is taxed yet again.]]
Phil has pointed out the logical fallacy in this argument (one which some people – I’m not saying you, Divemaster – insist on repeating even though they know it is untrue). When you earn a dollar, that dollar is taxed. When you invest that money, you are not taxed a second time on that dollar – you are only taxed on the extra money you made beyond that.
[[I would not have so much of a problem with being taxed on capital gains if they were indexed for inflation. That had been mentioned in previous posts, so I didn’t really go into it. But I think it would soothe a lot of feathers. ]]
Thing is, to do it properly you would have to index all income for inflation (since tyhe dollar you worked for in December isn’t worth what the dollar you made in February was). The same is more blatantly true of interest income (which includes bond income). The bottom line is, while it might be nice to index income for inflation, it would be extemely complex (and yet another occassion for the machinations of lawyers and accountants).
Meanwhile, again, bear in mind that, unlike other forms of income, capital gains are allowed to accrue from year to year without being taxed, and are only taxed once, when the investment is liquidated. This significantly reduces the bite of inflation.
[[Plus, I think it would be for the best if people would stop couching the issue in an “us” vs. “them” (rich bastards; tax the fuck out of them) debate. A lot of “us” have investments too.]]
Extremely rich investors love to hear “reg’lar folks” talk like that – you’re kidding yourself if you think they aren’t trying to manipulate the tax code and their investments to make themselves wealthier at your (overall) relative expense.
[q] Yeah, only the rich invest money. Lord knows nobody else buys a house, puts money in mutual funds or the occasional stock, etc. Must only be the rich! [/q]
While most of us have some sort of capital investment, the fact remains that most capital is in the hands of a very few: nearly 40% of the wealth of this country is in the hands of the richest 1%, and the remaining 60% is divided roughly 30-30 between the rest of the richest 10%, and the rest of us.
So there’s no arguing that favorable treatment of capital gains over ordinary income directly benefits the rich far more than the rest of us, whatever indirect benefits may accrue to society as a whole.
Oops, did the quotes wrong.