Lower taxes on capital gains less necessary than in the past?

This thread questions whether the lower long-term 20% capital gains rate is justifiable.

One of the arguments I’ve always heard for the lower rate is that stocks are riskier than fixed-income investments like bonds and bank accounts, so if they’re all taxed at the same rate, people won’t invest in stocks, leading to a shortage of capital, to the detriment of the economy.

One flaw I’ve always seen in this argument is that while stocks are riskier, they also offer greater long-term gain. So even without a lower tax rate, there already is an incentive to take the greater risk.

But I also submit that three changes in recent decades weaken this argument further:

  1. Fixed-income investments (currently) pay less than they used to. So people are more willing to take the risk of putting their money in stocks;

  2. Starting in 1974 (with Vanguard), low-fee index stock mutual funds have enabled investors to reduce the long-term risk of investing in stocks, reducing the need to incentivize stock investing over safer investments; and

  3. A quick look at the stock markets indicates that there ain’t no shortage of capital. (This isn’t a third reason, as much as it is evidence supporting the first two). And yes, a great deal of this capital is invested through low-fee index funds.

I present no evidence of it, but it makes intuitive sense that under these newer conditions, the lower capital gains rates may actually be acting to artificially prop up stocks. If true, increasing capital gains taxes might eventually lead to more market stability (following short-term pain).

I acknowledge that current circumstances could change. Interest rates could rise, dampening stock market growth and making bonds and bank accounts more attractive. Baby boomer retirees could start pulling their money out of stocks.

I also acknowledge that not even a Democratic administration – forget a Republican one – would risk alienating the people this would affect (the rich and retired) by raising capital gains taxes. FWIW, I’m fairly rich and (soon to be) retired myself, and I have a lot of my money in the market. So I would definitely lose money if capital gains taxes were raised.

But that’s the debate: have recent changes in the financial environment weakened the argument for a lower capital gains tax?

Lower rates on capital gains, of any sort, is because the people most likely to have capital gains are the people that write our tax policy. We could fund medicaid forever if FICA was an income tax and not a wage tax.

Then you’re hearing arguments from people who aren’t completely clear on what capital gains are. Or maybe you aren’t.

You can have them if you sell a bond, too. Or real estate. Or equipment that didn’t actually depreciate as much as the depreciation schedule called for. It’s not a stocks vs fixed income investment issue.

True, the stock market was really the only means I had of generating capital gains back when I was making seven-whatever an hour. But let’s take a look at the startups I work with. They’d love a piece of the “no shortage of capital” you’ve identified. Because they need to rent space, buy stuff, and pay people. You can pay people now with cold hard cash. Or you can dangle stock options or actual shares. A lower capital gains rate increases the net present value of these non-cash options. This decreases start-up costs.

But the title asks whether this is “less necessary” now. I can’t speak to that, because I don’t believe any specific tax policy is necessary, or that the necessity of one tax policy is something you can measure on its own or against another. Levying taxes provides disincentives. I’m not going to pretend I have an optimal way of balancing thise disincentives. But I do know the US Census Bureau is telling me there are fewer new startup jobs each year than there used to be (BLS BDS). And since new companies disproportionately contribute to new jobs, I’d need some convincing that making it more expensive to start new companies is the way to go

As in the other thread, I think the premise is not quite correct. What I have always heard is that the policy basis for a lower capital gains rate is not that stocks are riskier, but that the decision to sell stocks is so much more discretionary than other forms of income, like wages. The concern is that if the government were to raise the capital gains rate to be equivalent to ordinary income, enough people will decide not to sell their stock (or at least will defer the sale into the following year) that overall capital gains revenue will drop. In other words, the goal is not fairness as between different types of income, but maximization of federal tax revenue.

But isn’t it still a ‘riskier vs. safer’ issue?

It sounds like those startups’s stocks are riskier than my mutual funds, but I pay mostly the same rates as the startups’ investors do.

As I argued endlessly in the other thread, riskier investments like startups have vastly higher potential payouts. That’s all the incentive you should need; there’s no need for the tax code to further incentivize you.

Actual arguments in favor of the lower CGT rate (with which I do not necessarily agree) are more nuanced, as Tom Tildrum demonstrates.

No. It’s a year (or more) out vs now issue.

Then I recommend you seek professional assistance before investing in one. Unless it’s one I own a stake in.

Not me, pal. I’m strictly an index fund guy. :cool:

I’m not an economist, but I thought the world was awash in idle capital. Multiple trillions of dollars in capital is held by individuals and corporations all over the world.

In 2014, corporations had 7 trillion. I’m sure the number is higher now, and that seems to just be corporations. I’m guessing individuals hold several trillion more.

I recall seeing a speaker say what is truly lacking in the global economy are good investment vehicles. So if there is a way to incentivize the creation of those, that would be a good idea. But again, I don’t know how.

I would hazard that our Dear Leader has something to do with this. Unpredictable changing policies increases uncertainty, making sitting on cash more favorable.

That may be my bias showing, as poking around it doesn’t look like that a new phenomenon.

Sometimes, disincentives are needed, so as to discourage speculation. The people who want lower capital gains taxes are startups who want investment capital but also investors who want to keep more of their winnings, I mean ‘earnings’. Conservative economic policies take money from slower but steadier economic tools and place them into riskier areas of the economy.

We can see this now. Last year’s tax cuts aren’t really stimulating the economy in the long run; they’re incentivizing risk that will eventually spiral out of control. And I bet you that the amount that the “investors” pay will be limited. Guess who will end up picking up the rest of that tab?

Our kids (until Dems are in charge, then OMG we need to balance that budget ASAP.)

Taking this in another direction - Money aside, honest question, are there any constraints on the President for using the military within the borders of the US, or for using them outside of their defined missions? Or, as Commander in Chief, can he use the military resources for whatever he deems?

If he has infinite latitude, what’s to stop him from using them for mowing his lawn at Mar-a-Largo, carrying his golf clubs, frying up his morning bacon, OR for rounding up his perceived political enemies (I think you get the idea…)?

Did you mean to reply to the thread about using the military to build the wall?

To my knowledge the constitution prohibits using the military for most domestic purposes. I remember when the DC sniper was active, some people wanted to use military air support to track him but I believe that was unconstitutional.

However I don’t n ow which parts of the constitution that would involve.