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Increases in capital gains tax can decrease income equity

Published: Thursday, March 1, 2012

Updated: Thursday, March 1, 2012 00:03

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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3 comments

Anonymous
Tue Mar 6 2012 11:35
Google, Microsoft, Amazon, Apple, etc....all these companies were able to prosper partly because they were able to raise money in the stock market. It is the ability to quickly buy and sell a stock, ie liquidity, that gives investors the confidence to put money in those companies at all levels (angels, venture capitalists, investment banks, etc). The buyers and sellers of stock absolutely provide value to society simply because they create an active market.

Also, it is untrue that the govt takes more money from the poor. In fact, 48% of all people pay no income tax (this is the poor), whereas the top 1% pay a whopping 40% of all federal income taxes (while making around 20% of the income, so they pay more even taking into account the share of their income)

Another point: those companies that create products and services already pay taxes (corp rate of 35% is highest in the industrialized world). So, if there is $1 of profit, hypothetically, a company pays 35 cents in federal tax. If the remaining 75 cents is distributed as dividends, it would be unfair for that same profit to be subject to another 35 cent tax...that would be taxing that $1 of profit at 70%.

Doug
Thu Mar 1 2012 14:56
The 15% maximum on capital gains is for long-term capital gains; short-term capital gains are taxes at the person's income tax rate, which is a maximum of 35%. Your example "An investor, however, buys a stock one day, waits for a few days and then sells it at a higher price." is an example of a short-term capital gain, which is taxed at a maximum of 35%.
Mike
Thu Mar 1 2012 12:50
Dude, just because you don't think speculators don't provide goods per se, that doesn't mean they don't provide a service. They are useful in the fact that they provide a useful measure of where the market is weak and where it is strong. They move risk around in the market to those who can financially shoulder the burden. They also encourage stockpiling of resources that are expected to be more rare in a coming year, ie. if a drought killed off half of a wheat harvest.




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