Lets say you buy a stock at say $1 a share. It goes up like crazy and 5 years later you sell it for $500 a share.
Or lets say your parents bought a house in 1955 for $25,000. You sell it now for $1.2 million.
In both cases you pay about 15% capital gains tax and if certain people have their way, it could go way up.
Now I guess I can see a special tax on stock gains but I dont for real estate. Especially since the increase in the value of real estate is often how many families move into a higher income bracket.
What do you all think? Should we have a capital gains tax and if so, what should it be?
Also should certain things like real estate be exempt?
Isn’t capital gains on real estate, only on property NOT your principle residence? I’m pretty sure it is where I live. So, only house flippers and speculators owe, not Mom and Pop, following the house sale. (I think you have to reside in it a certain length of time for it to be considered your ‘principle residence’. And there is a limit on how many homes you can use for the exemption, over X number of years, I believe.)
I agree with the caveat that capital gains – and losses – should be indexed to inflation. So if you buy $5000 of stock in 1990 and sell it in 2010 for exactly $5000 then you should be able to realize a loss since you have effectively lost money. On the other hand, if you are a lucky and/or smart hedge fund manager who made millions in capital gains in a year, they should be taxed at almost a full 35% or whatever your tax bracket is for those dollars.
The only problem I’d foresee for this is that it would give incentives to politically influence the inflation rate.
The capital gains tax rate should reflect the fact that income collected each year is naturally taxed at a lower rate than the same income over the same period collected as a lump sum. Taxing capital gains tax the same way we tax other income means taxing it more than other income.
If capital gains were taxed at the same rate as other income, you’d at least want to implement a rule that you could spread it out to minimise your tax paid. If you earn $10k, $10k, $10k, $10k and $210k, but that $210k was taxed as if you earned $50k in each of the five years, that would be more fair than taxing them at a higher rate just because they “cashed out” all at once.
I think that such an addition would also be supportable, but even moreso than the gaming inflation issue, I think it would be open to gaming by people who would try to make it seem like they had a very low income. Maybe my feeling on that is inaccurate, but it reminds me of exploitable tax shelters for some reason.
Capital gains (and all other income) should be taxed at zero. I would also suggest that all other embedded taxes be eliminated (gas tax, taxes on phones etc).
Instead, there should be a single national sales tax as well as state sales taxes. Taxing consumption simply makes more sense. It would also put all the taxes in a single place so people would really see and feel what we are paying in tax.
The first $250k ($500k for a married couple) of gain on a primary residence is tax free at the Federal level. You have to have lived there for at least 2 of the previous 5 years. There is no limit on the number of times you can do this other than the 2 year constraint.
Capital gains should be considered income for short tern investments. I’d accept 5 years, but the 10 to 20 year range is more like it. Maybe start reducing the rate at 10 years.
Taxing non-inflation adjusted capital gains at the same rate as interest or wages, then having a layer of corporate taxation (of the profits which cause the investment to rise in value) is clearly tilted against capital formation. And the drop in growth in advanced economies (like the US) is correlated with (though always harder to prove cause) lower rate of capital formation.
IMO the best basic approach is to try to tax consumption rather than income, rather than carving out special treatment for capital gains or dividends. This can be done progressively. It would just mean that invested capital and reinvested capital returns get an unlimited tax deduction. Any non-reinvested returns or other withdrawals along with non-invested wage income could be taxed at the same series of progressive rates. IOW simply treat all investments as IRA/401k contributions are now: a deduction for the investment when made, no tax on capital returns kept in the account, but ordinary income tax on any withdrawal from the account. Then set those tax rates for different levels of net consumption (income minus investment) as you wish, a separate debate. A consumption tax, but not necessarily flat as a sales tax or VAT practically speaking must be.
The main reason this isn’t as easy as it first sounds is the transitional issue. People who have amassed significant assets by saving beyond tax deferred accounts (that includes home equity for example) but got no deduction when they invested that money, and have paid taxes on the returns all along, would now again have to pay taxes on that money under the new system when it’s withdrawn. This should only mainly affect well to do retired people, but that’s a politically active group.
Another post explained how the capital gains tax on principal residence works. But if a property is not your principal residence, there is also an important (US federal tax) advantage wrt capital gains tax which does not apply to non-real estate investments. It’s called a 1031 exchange after the relevant item in the tax code.
Say a real estate investor buys a small apartment building for $500k. Then some years later it’s worth $1.2 mil. Say she at that time would like to increase her real estate holdings and buy a $1.5 mil building. Under a 1031 exchange (jumping through some hoops and paying some extra expenses) she can take the $700k gain selling first building and apply it to reducing the tax basis of the second building. So no capital gains tax paid on the sale, but the basis of the second building becomes $1.5-.7mil=$800k. Ie if the second $1.5mil building is later sold for $2mil cash, the gain would be $1.2mil rather than $500k. But the 1031 exchange can be done again and again, as long as the new property is worth more than the one being sold. The basis can go to below zero.
Then another wrinkle of (US federal) capital gains taxation is that the basis steps up to market value if the property is bequeathed to an heir. So in real estate somebody can invest in more and more valuable properties, keep pushing cg tax on sales out into the future with 1031 exchanges, then the cg tax disappears if they die and leave the property to heirs.
The question is like asking what temperature should water be at? The answer will be different if you are looking to make tea than if you are looking to make ice cubes.
Capital gains get taxed differently depending on what we are talking about.
-if you buy a stock today and sell it tomorrow you pay the short term capital gains rate. If you wait a year, you get a lower rate.
-you can write gains off against losses to a large extent and carry net losses over into future years.
-you can sell a house you live in for a gain, and put that money into a new house and not pay the taxes.
-you can transfer certain real estate farms and businesses to the next generation and eliminate or defer or reduce the tax rates.
-passive gains and losses are treated differently.
-there is a free step up in cost basis in death so if you buy Coke stock at $5 and die with it at $49, and leave it to your son he can sell it at $49 with no gain.
-you can gift an appreciated asset into a charitable remainder trust, have the trust sell it, and pay you a life income, paying no capital gains and getting a charitable write off.
There’s more but those are the major rules, so it’s a complex question.
Are you trying to stimulate commerce and trading? Are you trying to maximize tax revenue? What kind of capital gains rate on what kind of asset during what kind of transaction are we talking about?
The question without context is asking what temperature water should be at. Tea or ice cubes? What you are trying to accomplish determines the answer.
The theory behind taxing capital gains at a rate lower than ordinary income is that overall revenue is maximized at a lower rate. Capital gain income is more easily deferred into future years than wage income: the taxpayer can decide to hold onto the stock or keep living in the house for another year rather than sell it, more easily than deciding to postpone work for wages.
In other words, the higher one taxes capital gains, the more that people at the margin simply do not transact, which means that no realized gain gets taxed at all. It’s hard to say what the exact rate ought to be, but that’s the thinking behind taxing it at something lower than ordinary income.
You already do, under existing rules. Wages get taxed when earned, however variably. Grumman is essentially suggesting that capital gains be retroactively taxed when earned, rather than when realized.
I agree with you. You need to know the cost basis no matter what, so to index that would be a simple matter of looking it up in a table. The government does index-linking of many things, e.g. social security payments.
The UK had indexation, but scrapped it when capital gains rates were lowered to 18% in 2008.