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View Diary: Reid: Social Security cuts for defense sequester relief would be a 'stupid trade' (255 comments)

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  •  gusty - thank you are a very thoughtful reply (1+ / 0-)
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    Mogolori

    I will end with just one example. For the year 2011 Congress passed a law that investments made in startups that met a certain criteria (number of employees, total capital raised) would have a ZERO long term capital gains rate when sold. As we approached the end of 2011 investments in startups surged. As it turned out Congress extended the law for a second year and in the 4th quarter of 2012, investments surged again. So while I agree that the primary incentive is the expectation of earning a profit, tax consequences do drive many investment, and other financial decisions.

    I am too lazy to go find the numbers but federal tax receipts from capital gains have gone down every time they are raised. Even the President when asked the question directly has stated that he knows that raising long term capital gains tax rates don't increase long term capital gains tax revenue. However, for him it is a fairness issue and he believes that long term capital gains tax rates should be higher. For me this is the biggest issue. The fact that higher rates don't lead to more tax revenue means that the case to raise them has a very high hurdle to meet.

    "let's talk about that"

    by VClib on Sat Oct 19, 2013 at 09:55:28 AM PDT

    [ Parent ]

    •  Two flaws I see in your reasoning here: (0+ / 0-)

      1.  A reduction in capital gains tax does not necessarily mean a reduction in taxes.  At least some of that reduction would be as a result of people not playing the waiting game for 12 months to pass before recognizing their profit, and therefore paying their tax as ordinary income or short term capital gain rather than  long term capital gain.  

      2.  Using an example of there being NO tax on a certain type of income is meaningless.  It raises absolutely no income for the government and is unsustainable.  Of course people would be willing to take a higher risk/lower profit if they don't have to share any of the profit at all but can share the risk.

      And overall, establishing a tax system that doesn't encourage people to play games with waiting is always a good thing.  It would enable people to make purely profit/loss decisions, without having to worry about timing so much.  When they have a chance to make a profit, they could go for it, without worrying about whether it's going to be long term or short term.

      This magical number of 12 months makes no sense whatsoever, but is established solely for the purpose of enabling a larger portion of unearned income to be taxed at a lower rate than earned income.  Set it up so that for every year you've held something, your tax get reduced by say 1%.  I'd have no problem with that.  If you've held it for 40 years, you get a significant reduction.  If you've only held it for 1 year, it would be very little difference.  People could then make decisions based solely on business reasons, without taxes being a major factor to consider.

      •  gusty - one year has been the standard (0+ / 0-)

        from the outset of the capital gains tax. In the beginning of the income tax investment income wasn't taxed. The one year requires the investor to take significant market risks and it stops short term trading from being eligible for long term capital gains.

        Revenue to the Treasury surges when capital gains rates are lowered because people view it as a good time to liquidate appreciated capital assets. The reverse is true. When rates are increased we see a surge, and we did in late 2012, leading up to the increase and then a decline in several years to follow. For financial assets there are numerous ways for investors to lock in profits without creating a taxable event while they wait for rates to decline. If the Democrats win the Presidency in 2016 they would likely sell the assets and pay the new tax, but they can certainly be patient for a few years. Certainly there are transactions that happen regardless of tax rates because of personal preference or market risks. But higher capital gains tax rates over time have produced actual lower revenues and always dramatically lower revenues than the CBO's scores. The CBO can only use static models in their scoring.

        There are many people who agree with you that the length of time an asset is held should be a factor. However, they believe the cost basis of the asset should be indexed to inflation and no tax paid on the difference between the cost and the new basis. Only that amount above the new basis should be subject to the long term capital gains tax.

        "let's talk about that"

        by VClib on Sun Oct 20, 2013 at 08:57:45 AM PDT

        [ Parent ]

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