(Thanks Corry El, for the explanation!)
There is an argument for saying that the increase in value of property is in part due to the amenity value added by the community as a whole through tax investment in public services and so on (particularly true here in the UK where proximity to good schools and public transport are important factors in the attractiveness of a property) - and so the community is entitled to some share in the return on that investment.
Time was, you didn’t buy property in the hope of capital gains, but mainly for the security of tenure and freedom of control over the roof over your head. If everyone expects capital gains beyond the general level of inflation in the economy, something’s got to give, and capital gains tax is one sort of brake on the potential for problems.
As a general principle that’s one thing, but it has to somehow account for the different nature of various forms of income, and other taxes. The two big issues are
-inflation: a tax on the ‘gain’ when an investment doubles in value over 20 yrs and prices also doubled has no analog in the taxation of wages as they are received.
-other taxes: if dividends are taxed at the same rate as interest (which is taxed at the same rate as wages), but companies can deduct interest from their taxable income but can’t deduct dividends, that’s a major subsidy in favor of debt over equity as a way of financing companies.
And as a previous post mentioned, you also can’t ignore the practical effect of people being able to postpone capital gains recognition, the effect that has on both tax collection and efficiency of deployment of capital, and it’s not really practical to ‘fix’ that by taxing unrealized capital gains.
I would have no problem with a single rate of tax for income which counted inflation adjusted capital gains, and if the corporate income tax were eliminated. Adjust rates and/or make more/less progressive as you choose. I prefer the suggestion above for a progressive consumption tax though.
Just because the right talks a lot about taxes and growth and ‘everyone knows the right is evil’ doesn’t mean they’re not at least partly right. 
Taxing nominal capital gains and dividends at full ordinary income rates would be a distortion and lower growth further. As with most tax topics, that’s not disproved by pointing out that various distortions and high rates accompanied higher growth in the past. The country had more going for it in other ways, and there were lots more loopholes in general.
I think we should encourage investment and savings among lower income and middle class people. In terms of raw revenue virtually no capital gains tax is collected by low AGI households (the amount is so low as to be irrelevant.) Meanwhile vast amounts of income tax aren’t collected on high AGI households since a huge portion of their income is in the form of cap gains taxed at a lower rate. And yet having to deal with cap gains taxes is something that adds a lot of complexity to a middle income person’s tax returns, and makes investing and saving more complex for people who have less access to financial advisers.
My proposal would be households with AGI up to $200,000 pay no taxes on capital gains, interest, or dividend payments unless those income sources are greater than 50% of their AGI, at which point they will have to pay regular income. [I regret that last stipulation, but I feel entrepreneurial freelancers and contractors might find a way to make all their income technically dividends or something and avoid paying any tax otherwise.]
For households above $200,000 I’d say all cap gains other than those on tax-free municipal bonds simply be taxed as ordinary income, at the current schedule.
Households above $1,000,000 AGI I’d phase out muni tax free status, and add a new, higher top income tax rate.
Tell conservatives you’ll consider a flat tax if the rate also applies to capital gains and any other form of investment income.
Just for laughs, of course.
Yep. or not taxed in certain rares cases, like gifts. There should be no way of dodging taxes by changing the type of income.
FTR, when I said “equally” I certainly didn’t mean “one flat rate.” I just meant, no social-engineering distinctions made in the source of the income.
That said, I’m wondering what you think is laughable about the proposal you frame. I can imagine some “conservatives” going for it, others being strongly opposed.
Clearly we have varying senses of humour.
Personally, I’m in favor of eliminating the long-term capital gains rate altogether.
That said, I’m a big fan of IRC Sec 1202 and 1244 rules that apply mainly to small business stock held by company founders for 5 or more years. These go a long way toward eliminating double-taxation issues on dividends and capital gains, which keeps a C corporation structure as a viable option for these owners, and the fact that these companies are by definition startups means that you’re rewarding the people who are most directly involved in creating new businesses and new jobs.
One problem with taxing capital gains as normal income is that it makes liquid assets, and assets that can be sold in small increments, tax advantaged because income tax is paid annually. Which effectively gives tax advantages to rich people (who own more things like stocks and bonds) over less-rich people (who tend to own things like houses and small businesses)
If you own stock, you can structure sales to minimize taxes, by making sure you don’t go into a higher bracket. But you pretty much have to sell a whole house all at once.
Someone who buys a house, lives in it for 30 years, then sells it and has a gain of $1 million, or someone who builds up a small business over 30 years and sells it for a gain of $1 million should probably not be taxed the same way as someone who makes $1 million every year.
I know. I was simplifying for the masses
Obviously not. The last guy will be in the $1-million bracket every year, the others only once.
There have historically been three major arguments for a capital gains tax.
Double taxation. In the case of stock and perhaps other things. Some of the capital gains represent value that has already been taxed at the corporate level. There is a principled argument to be made against double taxation of corporate profits but people are generally free to choose another form to avoid corporate level taxation so if they use a C corporation, they are getting some advantage that makes them do it that way. It rarely ever affects small or micro businesses.
Income bunching. Capital gains are frequently the current recognition of income accreted over several years. This used to be a huge deal when a million bucks could mean the difference between 24% and 90% for a middle class family. Now it means the difference between 25% AND 39.6%. The argument has been much less compelling on this front for at least 30 years.
Attract investment. The notion is that lower capital gains rates will encourage investment because otherwise rich people will stick their money under their mattresses or something. In fact what it mostly does is give rich people an incentive to invest in stocks rather than bonds.
I find none of these arguments to be nearly as important as the fact that rich people don’t like paying taxes.
I think it is worth pointing out that corporations do NOT get a preferential capital gains rate and they seem to have no problems investing in stuff. Of course they are generally less subject to double taxation and their tax rates are pretty flat.
Yeah, and every dollar is double, triple and quadruple taxed anyway. I earn my salary, which is taxed, then spend it, which is taxed and so forth.
Double taxation is more of an argument (and a valid one IMO) for lower rate for transferring assets out of your C-corp. I’m not really seeing how that translates to cap gains, but am interested in hearing that fleshed out.
By not indexing to inflation, we are taxing losses .
It’s a lie the rich people have spread, along with “Death Taxes” (that force small family businesses and farms to sell to pay) and “trickle down”.
I’d like to read more. Please cite your source.
I don’t have a lot of sympathy for those who think that investment income should be taxed at rates than income earned by the sweat of your brow but your argument doesn’t really apply. The beneficial owner of that income is taxed at two levels.
A few comparisons might be useful in getting us all on the same page.
Lets say there is no capital gains preference and the tax rate is 40%.
If I buy a hot dog cart for $100 and I earn $500 with that hot dog cart and I sell my hot dog cart at the end of the year for $200 I have $600 of income ($500 of income earned with the cart and $100 appreciation in the value of the hot dog cart). I pay $240 in taxes and I am left with a $360 gain plus my $100 seed money.
If I create a corporation and pay $100 for all the stock and the corporation uses the $100 to buy a hot dog cart and the corporation proceeds to make $500 then the corporation pays taxes on $500 of income on which the corporation pays $200 in taxes. Now my stock is worth only $500 ($200 for my hot dog cart that has increased in value to $200 and $300 of after tax income from what I earned that year). If I sell the stock for $500, I will recognize $400 of profit (I invested $100) and pay $160 in taxes. This will leave me with $240 in gain plus my $100 seed money.
The only difference between those two situations is the interposition of a corporation. That is why it is called double taxation without a hint of duplicity or irony.
The attack on the estate tax was an entirely different thing. It was the heirs to the mars family fortune (along with several other heirs of several other fortunes) trying to buy congress to lower their tax bills.
Some of the push to eliminate taxes on capital gains falls into this category as well and most of the arguments are not fantastic but they can be made in good faith. The attempt to repeal the estate tax was a propaganda campaign that used lies to convince the average American that the estate tax would somehow affect anyone who died.
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Real estate shouldn’t be a blanket category because an investment property is vastly different than a principal residence. IMO an investment property should be treated like any other capital gains; gains on a principal residence should have no tax liability at all. At the same time, mortgage payments for a principal residence shouldn’t be deductible, which balances it out fairly and takes a principal residence out of the realm of being an imputed “business” which it certainly is not. And yes, it’s true that capital gains on a principal residence have helped support many a retirement, and this is a good thing.
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The formula for capital gains tax should be in terms of a percentage that is deemed taxable, and that percentage then taxed like any other income at the individual’s marginal tax rate. With a suitable choice of percentage, that makes capital gains tax both fair and progressive.
Maybe that’s supposed to be a joke, but if not, it’s hard to believe anyone actually thinks in terms of such extreme far right ultra-regressive conservative/libertarian nonsense that’s so far out that it’s not even on this planet, and is somewhere out beyond the orbit of Neptune.