It’s still awesome though, because your bracket in retirement is almost always lower than your bracket while working.
My mistake, fair enough.
There are plenty of people who would argue that it shouldn’t be the government’s job to do that. Discount the gain for inflation, and tax it at the same rate as short term gains.
That’s too high. Workers don’t take on risk. Investors do. If inflation and taxes are taking away a large portion of your gains, then the house always wins.
Such a policy would actually encourage speculation, since the only way to make any kind of money would be to go for the big gains. If you get only 10% per year, then you’re actual gain after taxes and inflation is only about 6%. So in order to get any kind of decent return you’d have to go for the hot investments.
Very few nations treat capital gains the same as earned income. And even those that supposedly do have lots of exemptions and deductions. It’s better to just have a lower rate than all kinds of exemptions. The government should be preventing financial meltdowns, but they should not be encouraging certain types of investment over others.
Unfortunately, there are also plenty of people who believe in limited government for things that don’t impact them, and big government for things that do impact them. Which is why I pointed this out.
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TNSTAAFL. If you reduce someone else’s taxes, yours go up to compensate.
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“The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.” Anatole France
While technically, everybody can use the break on capital gains tax, in practice it’s only rather well-to-do that can use it to any significant advantage. Giving tax breaks to rich people is not something that makes more realistic people happy.
- Right now there is an excess of investment money out there with few good places to put it. Encouraging people to invest in this sort of environment is nonsensical. The US economy is consumer driven. People need to have money to spend money to stimulate growth. The low and middle income people are the best in terms of spending percentage of their wealth. Upper income people are terrible consumers. Who should get tax breaks? (Cf. point 1.)
From a fairness issue, you have a point. If I invested $12k 20-25 years ago, and the investment is now worth $24k, I’ve made no money at all on a real basis. A $12k car (take your pick of brand and model) in 1993 would cost about $25k now. So, it’s really unfair that I get taxed at all on that so-called gain. If that investment had gone up to $50k instead, then I have a real gain in purchasing power. Having long-term capital gains taxes lower than earned income is a compromise to encourage investment while somewhat offsetting the effects of inflation. Arguing that capital gains should be taxed as income is absurd.
But from the perspective of being able to do this, it would be a nightmare. Say, instead of a lump sum, I invested $5k in 1990 and then an additional $7k in spurts over the next five years. To do the inflation-indexing you suggest, one would have to look up CPI figures and do numerous calculations. It would be way to burdensome - though I would argue that the tax code is already far too complex and burdensome, but that’s likely another argument.
I could make a similar argument regarding interest. If I put money in a bank account or bond and earn 1%, I’m not even keeping up with inflation, and yet I’m taxed on it. I’ve already been taxed on the money that was invested, so taxing me on the interest is a form of double-taxation.
But you’re not really “investing” (and I say this as someone with a lot of exposure to stock market). Once you get past an IPO or secondary offering (where the company in question actually sees cash coming onto their books), the stock market is to a large extent a casino/semi-Ponzi scheme - you make money by selling the stock you bought at a higher price. And why does the price go up? Because the next guy in line thinks that he’ll be able to sell it on to person #3. I see no reason that money earned that way should be taxed less than what is earned by a lumberjack.
Now, there are some fundamentals that drive some of the price changes (seem Buffet and his ‘intrinsic value’), and if a company pays a dividend, that is a tangible return on your investment.
But for the most part, people (including me) are buying tulip bulbs. There is a large enough market and variety that I doubt the merry-go-round is going to stop anytime soon, so I’ll keep on riding.
It’s funny because this topic would not have interested me a few weeks ago. Except that now I’m paying CG tax on stocks that were liquidated and paid me proceeds when the company was bought out. In fact, a tax expert was telling me about the whole “long-term investment” stuff just last night and I spent a couple hours looking through my financial records to get proof of all my cash payments into the stocks. On one hand, I’m thinking, “Man, I hope a whole lot of this is what I paid into it so I can discount it from the CG.” Then I realized that the higher the percentage of the account was my cash payments, the worse the return it had given. So it’s a catch-22. If I want more profit, I’m going to have to deal with more tax.
It’s only gambling in the short term. You are buying shares in a company, and as that company’s revenues and earnings grow, the value of your investment grows. In the short term, a stock can go up or down for reasons totally unconnected to their fundamentals. But over the long term, a company that sees good earnings growth will see its stock price grow.
When it gets speculative is when stocks, or real estate, go up and up very fast because people expect for that it will continue to keep going up for quite some time. Then you end up with a bubble and a crash.
Depends on how long you plan to be in the market:
How the baby boomers have blown up the stock market
Seems reasonable to me. Who is going to be investing as much in the market as the boomers? When we take our money out of the market in retirement, anybody left in is going to take a bath.
But take a bath compared to what? That’s not entirely a rhetorical question; maybe there’s some ideal hedge against the boomers withdrawing their money as they age. I just don’t know what it is. It’s not like any broad investment category is going to be particularly high-performing at the time the boomers are withdrawing it all.
So the best take-away I have for this is that you should diversify investments and that it might be a better idea to make your plans using a lower rate of return than we’ve seen recently. But both of these would qualify as sound advice at any time in history.
Really? I would have never guessed!! 
Dividend yields are at historic lows because of the Boomers. Once they get out, dividend investing will become more viable again. But timing matters. Sure, Gen-X is going to have to be careful. We started investing when Boomers were really starting to put their money away, and they will be taking it out more and more the closer we get to retirement. Millenials are doing their early investing in today’s market, but they’ll be doing their biggest savings when Gen-X is retired and the Boomers are mostly dead. Over the long term, even with demographic change, stocks should be a great deal. Productivity increases alone will increase corporate earnings a lot. So even if P/E ratios drop as Boomers pull their money out, it won’t kill the investors left in. They’ll still be benefiting from buybacks, higher dividends, and higher earnings through productivity gains.
Huh. I invested my retirement accounts in professionally managed mainstream mutual funds for 35 years. I would have much larger nest egg if I had left everything in a regular checking account as my retirement portfolios are worth much less than the money I invested in them. For 35 years.
I will admit the timing was bad— for most of those 35 years my contributions were relatively small and I was making my largest contributions in the bubble years.
Mutual funds don’t always invest wisely plus they take fees. Not all of them are smart investments. But the average stock market investor over the last 35 years should have some pretty kick ass gains. The Dow has grown nearly 20 fold in the last 35 years.
You are either being robbed blind by adviser fees, or have somehow chosen horrible investments. Any sort of diversified package of stock investments should be up by a considerable amount. I have more than a half-dozen mutual funds I have invested in over 25 years, and they are all worth a lot more than I invested. I’m fairly confident you are mistaken, have been the victim of fraud, or you poorly timed the market by switching out of stocks during the past several corrections.
It’s funny how often I hear from people that they’ve been investing for decades and have lost money. I can only assume they are getting in when the market is hot and getting out when it crashes. Or their financial managers are doing it. It takes talent to lose money when the Dow was less than 1000 when you started and near 18,000 today.
The goal, as with any tax, is to maximize revenue, and so the point of the lower rate is not to encourage investments but to encourage sales of investments; i.e., to maximize the transactions that generate capital-gains tax revenue. A wage-earner needs income to survive and cannot say, “income tax rates are so high that I’m just going to stay home and not work.” Someone holding a long-term asset, however, by definition does not need that money for day-to-day life, and so as capital gains tax rates rise and the cost of selling an asset becomes more expensive, on the margin more and more investors will decide to hold on to a stock for another year rather than sell it.
At some point, if the government raises the rate too high, the number of transactions will drop to a point that means less revenue for the government overall. Conversely, of course, if it drops the rate too low and makes individual transactions too cheap, overall revenue will fall even as the number of transactions rise. In theory, the capital gains rate is set at a level that tries to maximize overall revenue by not tilting too far in either direction. In practice, whether the existing rates achieve that goal is of course debatable. It is not surprising, however, that the capital gains revenue-maximizing rate would be below the rate that maximizes wage income tax revenue, because of the greater investor flexibility noted above.
Bolds are mine.
Rather than adjusting the tax rate, Ireland allows taxpayers in some cases to adjust the basis of their investment according to a published inflation factor. It would be stupid easy, not way burdensome. I’m not aware of any other country that does this. It seems to be much less ham-handed than just having two rates.