Increases in capital gains tax can decrease income equity

By Richard Zhang COLUMNIST
On March 1, 2012

Newt Gingrich promises to eliminate the capital gains tax so more money can flow into the market. This sounds like a good plan in theory, but after some careful thought, it may not be so great.

It is a growing phenomenon that wealthy people, compared to the middle class, are paying a lower tax rate because their main sources of income are capital gains rather than salaries. Capital gains are the profits earned from investments, such as bonds, houses and stocks. The current maximum tax on capital gain is only 15 percent while the highest income tax rate can go all the way to 35 percent.

This leads to some awkward situations. Because the richest 20 percent of Americans account for 86 percent of the capital gains, they are affected most by the 15 percent capital gains tax. Warren Buffet, for example, has an effective tax rate of 17.4 percent - mostly on dividends - whereas his secretary pays a higher income tax rate.

Something is wrong here. It is wrong because it violates fundamental logic. Does it make sense for the government to take more money from the poor than from the rich? By doing so, the government can only make the poor poorer and the rich richer, further splitting the gap of economic inequality.

According to a 2011 Congressional Research report, the low capital gains tax has increased the income inequality in recent decades as dividends and capital gains become major sources of income for wealthy Americans. But that is not the only reason why we should raise the capital gains tax.

Think about it. The government collects taxes because it needs the money to improve our lives: road maintenance, dam construction, police salaries, etc. All of these services need money. And as a part of this community, everyone should also pitch in to help build a better America by not only paying taxes, but also producing goods and services.

These goods and services will, in turn, benefit all other members of society. An investor, however, buys a stock one day, waits for a few days and then sells it at a higher price. What sort of goods and services does the investor produce? Barely anything.

In a way, the Wall Street investors are like poker players who simply play the game of speculation, gaining a lot of money but producing nothing to benefit society.

If Wall Street investors are nothing but poker players, it would only be a fair game if the government raised the capital gains tax to make them contribute equally to the rest of society.

Richard Zhang is a student at New York University.

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