I’ve never had experience with a capital gains situation, but now I might. I read online the purpose is to encourage long-term investing. As such, if a property (or something of value) is held for more than 1 year, the tax is 15% vs. 25%. Isn’t that a good thing? No one likes to pay tax, but everyone makes capital gains to sound so bad. Isn’t it actually working in one’s favor, or am I missing something?
What people complain about is that capital gains taxes being lower than earned income tax favors the rich over the poor.
No, paying taxes is always bad for the taxpayer. The investor has less money than they would otherwise. What the capital gains tax structure does do is incentivize long-term investing. Whether long term investing is good for society is a topic of debate that doesn’t have an unambiguously correct answer.
It gets even better if you’re in a low tax bracket. Then you pay zero long term capital gains. So if you’re in a low bracket, holding on to your investments benefits you even more.
Paying taxes, like long-term investing, may be a net positive for you and for society. It is a matter of debate in exactly the same way. Saying that it is always bad cannot possibly be stated as a fact, except to poison the debate.
While there are factual answers possible, there will be many opinions offered. Moved from GQ to IMHO.
samclem, moderator
Perhaps I wasn’t clear in what I meant. Of course it is beneficial to society to collect taxes and have a government, and that makes life better for everyone. But any individual would rather everyone else pay taxes while he didn’t. There isn’t really a plausible mechanism whereby someone would be better off if he had less money and the government had more, which is why people don’t spontaneously send extra money to the government but instead try to minimize the amount of taxes paid.
No matter what, it’s still Capital Gains. The difference is between Long Term and Short Term Capital Gains. Just saying “Capital Gains” doesn’t really tell you anything.
Impossible to answer without an example of what you are talking about (emphasis added). I’ve never made them sound bad, so it’s not “everyone”.
Long Term capital gains taxes being low are a somewhat mixed blessing. You have your capital tied up for a while - and if its truly long term, inflation has eaten away at that dollar you gained in 1999. But you’ll still pay long term capital gains on that dollar when you sell it in 2015, and at the same rate you’d pay for a stock you held for 366 days - whereas gains on stock held for 363 days will get taxes at your marginal rate. I’d rather see capital gains taxes indexed to inflation over the holding period - which, with 21st century tax preparation software, would be relatively easy to implement.
Thanks, all for your thoughts. Sorry, Moderator…only in hindsight do I now realize this could become an IMHO question.
Why is it the job of government to encourage investment? Doesn’t the market do that by returning a profit on the investment? Is the invisible hand so weak that investment won’t happen without government meddling?
It’s not the government trying to encourage long term investment so much as to discourage short term speculation. That’s why short term rates are higher than long term rates.
Why is that a legitimate function of government?
Because mass speculation nearly always ends badly for the national economy. Just before the Great Depression, it was John D. Rockefeller I think who said that when the janitors are trading hot stock tips, the crash isn’t far away. Our last crash was signalled by tons of people who were not experienced real estate investors attempting to flip houses for short term profit.
So averting a negative impact on the economy is a legitimate function of government?
I wouldn’t give the government too broad a mandate to do ANYTHING, but yes, as long as they stay within the limit of their powers, it is a legitimate function to prevent financial meltdowns.
It’s like protecting us from crime and terrorism. Legitimate government functions, but not a blank check to do whatever in the name of keeping us safe.
So stimulus spending is OK?
Sure. I think it’s not very useful and often a waste of money, but I guess it’s fine. Tax policies that discourage speculation, like a Tobin tax, are probably more effective though. Then we only have to worry about cyclical recessions, which the Fed has more power to deal with than Congress.
That doesn’t really seem like the point of this thread, but is worthy of it’s own great debates (I’d post a response there but not here).
From the OP’s perspective, and the perspective of most individual investors, the government has a right to tax, and if they choose to tax LT capital gains at a lower rate, that’s a good thing for people who have those kinds of investments. Anyone who owns land, a house, stocks over 1-yr old, or a business, or an IRA (excl. roth) benefits from lower LT capital gains rates. That covers a huge portion of U.S. households. Significantly changing the rates or laws even with grandfathering would really f-up a lot of retirement, college, and other financial plans, hence the strong feelings on the matter.
Of course folks who live paycheck-to-paycheck have a understandable beef, but they also tend to get other tax breaks that folks with higher incomes don’t. The relative fairness is of course highly debatable.
So I would say congrats, Jinx! Now you have a more invested position on capital gains taxes (literally and figuratively)!
Emphasis added - regular IRA distributions are taxed as income, not cap gains. Which is mostly fair, since you’ve been earning tax-free on them for the length of the investment.