Capital Gains - Sweet Deal for the Rich

     The tax on capital gains taxes the profit or gain that you realize when you sell an asset (stocks, bonds, a painting, a collector car) that has appreciated in value.  Sometimes it’s called passive income because you don’t “do anything” (like work) to generate the income.  Capital gains have traditionally been taxed at a lower rate than regular income (like for working).

      The reasons are certainly what the late John Kenneth Galbraith would have characterized as “conventional wisdom” – values or opinions that have been an unquestioned fixture for so long that they are recognized as revealed truth.  Such as:  

      ·         Capital gains are a form of savings and you should not provide a disincentive to save in favor of immediate consumption. 

      ·         Capital gains derive from the risk of investing: Risk-taking and capital formation drive a productive economy:  (Again) you should not provide a disincentive to take risks.

      ·         With inflation, taxing a capital gain unfairly taxes a gain from inflation.  A lower rate compensates for this distortion.

      ·         More revenue is collected when capital gains are taxed at a lower rate than when they are taxed at a higher rate.

     Here’s the news:  None of these are demonstrated truth.  They are assumptions about how the economy works with only tenuous relations to research,data, and a consensus of scholarly opinion.   Warren Buffet says, “The idea that higher tax rates will stifle investment and productivity is bunk. The ultrarich, including me, will forever pursue investment opportunities.”

     What is clear is that these assumptions are self-serving for the group of people who benefit from them the most. With a tidy nest egg, you do not have to work for a living (marginal tax rate 35%).  You can live very well off the passive income from your investments including interest but especially dividends and long-term capital gains (marginal tax rate 15%,  2008-2012) .  That’s why Romney’s effective tax rate in 2011 was 14.1%. Warren  Buffet's was 11.06% for 2010.  

      It’s easy to see where this is going.  President Obama and Buffet himself are calling for a tax reform which would follow the “Buffet rule” – put simply, that zillionaires should pay taxes at a higher rate than their secretaries and plumbers. At present, our ostensibly "progressive" income tax is regressive when taxing our highest income earners.