Capital Gains Tax: Myth and Facts

By Aiya Anvarova

The idea that the lower capital gains tax rates are a good thing for the economy that spur investment, lead to job creation, encourage people to sell assets without fear of tax consequences and actually raise total tax revenue has rooted so deeply in the minds of Americans, both Republicans and Democrats, that the Congress hardly has ever questioned the validity of this theory. However, recent dismal economic slump has led many people to doubt some of the principles of the American economy, including the premise that the lower capital gains tax promotes economy. Despite the fact that it has become a common belief that the low capital gains tax rates encourage active investment and economic growth, there is no sound historic evidence to support this assumption.   

Since 1950 capital gains have generally been taxed at a lower rate than income, to spur investment. The rate under President George W. Bush went from 20 percent to 15—the lowest ever—and was presented as a measure to stimulate the economy. However, this approach didn’t bring any significant improvements in the state of economy. In fact, the years following the 2003 tax cut were part of the most dismal economic condition since the Great Depression. All the economic indicators such as output growth, job creation, poverty reduction and investment were all below average, if not all-time lows.

One of the arguments in favor of the lower capital gain tax is that if capital gains taxes are high, asset owners may be reluctant to sell their assets and trigger the tax. Therefore, they hold onto the investment, resulting in an inefficient allocation of capital that reduces growth. They will be willing to spend the capital on consumption rather than invest it, again reducing economic efficiency. In other words, if the capital gains taxs are high the capital owners will be unwilling to invest their assets that will lead the economy into stagnation.  

However, these arguments popularized by the Republicans don’t seem to be supported by the history and the facts. There’s no real evidence that a low capital gains tax rate boosts the stock market, investment, or the economy in the long run, rather it will have some temporary effect. “I have worked with investors for 60 years,” said Warren Buffet, “and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.”

In fact, it hasn’t always been a foregone political conclusion that the capital gains rate should be lower than that for income. The 1986 tax reform enacted by President Ronald Reagan set capital gains at the same rate as the highest personal income bracket, which was reduced from 50 to 28 percent. The reason why Reagan’s administration decided to increase the capital gain tax was not an ideological decision but rather an attempt to raise the money for the government and this strategy worked. The low tax rates on capital gains are also an important part of many individual income tax shelters, which employ sophisticated financial techniques to convert ordinary income to capital gains. The strategy of equalizing tax rates on capital gains and ordinary income may help solve the problem of the enormous tax avoidance spawned by the low capital gains tax as it will discourage capital owners from hiding their income as an investment.   

Based on the historic evidences, including the effects of the 2003 unprecedented capital gains tax cut, the low capital gains taxes don’t have direct long-term positive impact on the savings, investment and economy, in general. Various independent studies showed that there was no statistically significant correlation between the capital gains tax and economic growth from 1950 to 2011. In fact, the reduction in capital gains tax was often followed by the economic slump and rising unemployment. Thus, the argument for lower capital gains rates rests more on faith than science.

List of References

Mufson S., and Yang J. L. (2011. Sept. 11). Capital gains tax rates benefiting wealthy feed growing gap between rich and poor. The Washington Post. Retrieved from http://www.washingtonpost.com/

Stewart, J. B. (2011, August 19).  Questioning the dogma of tax rates. New York Times. Retrieved from http://www.nytimes.com/

Romney and Obama on Investments

It can be difficult to have a lovely country or at one that looks “decent” without having the tax element, don’t you think so? Taxes are what keep the country’s presentation to the world looking fine. If the people wish to have a wealthy country then it is not only the job of the government to do its job by helping the people out but also the people’s job to pay taxes so that the government may help them out. Taxes are a duty all Americans have to the nation if we expect to see the evidence of a great and prosperous economy. A conflict the nation has nonetheless faced is who and when should taxes be higher or lower. On the issue of taxes on investments, President Obama believes taxes should be higher while Mitt Romney believes they should be cut.

Romney would agree with the quote “Paying taxes should be framed as a glorious civic duty worthy of gratitude - not a punishment for making money” by Alain de Botton. Not only does Romney believe that the wealthy should not pay higher taxes he also believes that if the rich has more money in their hands they’ll create jobs which will eventually lead to more money for the economy.

In an article from CNN by William Gale, “Romney starts to fill in blanks on his tax plan” Mr. Gale sated “During the summer, two colleagues and I showed that if Romney did not want to add new taxes on savings and investments -- and raising savings and investments is the second of four main planks in Romney's overall economic package -- he could not finance his tax cuts without generating a net tax cut for households with income above $200,000.” Although Romney’s intentions would be to help encourage the rich to make more investments by cutting taxes on investments, it is difficult to say that it would work out to make enough money to help improve the country’s economy

In an article by Jeanne Sahadi “The facts behind Romney's $5 trillion tax plan” she stated “Romney wants to cut everyone's income tax rates by 20%, slash the corporate tax rate even more, repeal the Alternative Minimum Tax and make investments tax-free for those making less than $100,000 ($200,000 if married).” Romney simply wants it easier for the rich to make more investments so that there could be more money coming into the economy however a issue that arises with his proposal is that those who do not meet the standards of making $100,000 or $200,000 if married get taxed which in the eyes of some may seem unfair. The rich will continue to get rich as some may say.

Obama’s view on taxes on investments is very different to Romney’s. Obama would agree with the quote “The 400 of us pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you're in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent” by Warren Buffett. Obama has often stated that if the middle class is doing good than the economy is doing great but if the middle class is not doing well than neither is the economy. He says this because it is the middle class citizens whom go out and put money into the economy more than the lower and rich income citizens.

In the article “Obama-Romney on taxes: How much should the rich pay?” also by Jeanne Sahadi, it stated “…President Barack Obama wants high-income households to pay higher tax rates on income and investments. His stated goals are to help reduce deficits, to help the country make critical investments and to increase fairness in the tax code.” Why does Obama believe this is the right thing to be done? It is simply because he sees it as being more fair.

It has always been an obligation by the people whether they like it or not to pay taxes because it is what keeps our nation going on a stable if not very rich economy. As Benjamin Franklin once stated “Certainty? In this world nothing is certain but death and taxes.” He was indeed right but perhaps it is not only about just paying taxes, it’s about taxing fairly as Obama may see it or it is in fact right to not tax some for the benefit of the country as Romney may see it.

Sources:

Gale, William. "Romney Starts to Fill in Blanks on His Tax Plan." CNN. Cable News Network, 01 Jan. 1970. Web.

Sahadi, Jeanne. "The Facts behind Romney's $5 Trillion Tax Plan." CNNMoney. Cable News Network, 12 Oct. 2012. Web.

Sahadi, Jeanne. "Obama-Romney on Taxes: How Much Should the Rich Pay?" CNNMoney. Cable News Network, 06 Nov. 2012. Web.

2008 Obama Tax Plan By: Enrico Silva

The 2008 election was one of the most important events in presidential history. America made its decision for who was going to be our leader to guide and pull the nation out of what is to believe the worst recession since the great depression. That chosen leader was Barack Obama. One of Obama’s plans to help the economy was his tax policy, specifically what he was going to do with income, payroll, investment income, and estate taxes. As of yesterday, being re-elected for president for four more years, has Obama’s tax policy help rehabilitate the economy or deteriorated it even more?

             

In 2008, Obama’s proposal for income taxes was to restore the top two income tax rates from 33 % and 35 % to 36 % and 39.6 %. This proposal would also reinstate limitations towards how much one receives on given deductions or personal exemption higher-incomers can take. The tax cut that was imposed before Obama’s proposal was called the Economic Growth and Tax Relief Reconciliation Act. According to the previous post, this act indeed contributed a great amount towards the United States deficit. For his proposal on investment income taxes, he wishes to continue treating gains and dividends equally by keeping the current rate for everyone except for high-income households 

            

What Obama basically wants to do is renew the Bush tax cuts by keeping the tax rates for lower and middle income individuals/families while at the same time letting the rest of it expire, which will increase tax rates towards those who obtain high income. Based on the “Analysis: A look at tax deal's pros and cons” by Richard H. Dunham, not only was this tax cut unfair to the majority of Americans, but it does not and cannot help with the creation of more jobs in the United States and that this plan will only benefit to our country’s deficit by about one trillion dollars during a short amount of time.      

            

In addition to his policies, for payroll taxes, Obama wishes to tax amounts over the salary of $250,000. This falls into play with what the borderline between middle and high incomers with anything being above $250K high income. He wishes to make the Social Security Program more progressive by better funding it. What Obama also wants to do is to freeze estate tax exemption amount at $3.5 million from its $2 million level and the $1 million level it's set to revert to in 2011. He will continue to keep the current rate of 45% which would change to 55% in 2011.

           

According to Timothy Hoah”s “You Don’t Raise Taxes in a Recession”, as of September 2009, our economy has slowly but surely growing from the recession. Seeing as though Obama is president during the time, it may seem he did help our economy. Some may say that this may not be the case. Until Obama’s new Medicare tax hikes on high incomers will come into effect January 2013, we can then see if this will eradicate our deficit.

             

America made its decision in 2008 and elected Barack Obama. Obama’s tax plan is said to help our nation’s deficit into reducing it and it is contested whether he did or not. Majority of the U.S population voted for the re-election of Obama and this action speaks louder then it’s words. If it didn’t, then there’s four more years to decide whether or not Obama’s tax policy is a gift or a curse to our country.       

Sources:              
The New Republic "You Don't Raise Taxes In a Recession" By: Timothy Hoah 
CNN: What Obama Means By Tax The Wealthy 

Bush-Era Tax Cuts

During George W. Bush’s term in office, he proposed two tax cuts, better known as the Bush-Era tax cuts.  Congress eventually passed these tax cuts but had expiration tags attached to them, set to expire in 2010.  During Obama’s term in office, he extended the acts that were passed to expire in 2012.  Now that we are nearing the 2012 Presidential Election Day, each candidate has a different take on whether or not to continue and keep the Bush tax cuts.  Obama wants these tax cuts to expire for the wealthy while Romney wants to renew it for all classes with a low tax rate.  As much as it may sound good to decrease the percentage of tax placed on Americans, all it has done was add to the country’s deficit. 

The 2001 tax cut was known as the Economic Growth and Tax Relief Reconciliation Act. This act made a lot of important changes to income tax rates, real estate, 401k plans and much more.  Those making more than about $312,000 had their taxes cut from 39.6% to 35%.  The next category decreased from 36% to 33%, and so decreasing each bracket by 3% by 2006.  This act also created a new category for those making less than 12,000, cutting their taxes from 15% to 10%.  Under this act, the alternative minimum tax exemption was raised to $49,000 for couples and about $35,000 for singles. The 2003 tax cut was known as Jobs and Growth Tax Relief Reconciliation Act.  This act decreased the capital gains and was made to speed up the process from the 2001 act.  This act also increased the exemption for the alternative minimum tax.

The main goal of these was to reduce the tax rate over the span of several years.  It has not helped the economy grow in any way and is actually considered to be the top U.S. debt contributor.  According to Harry Bradford, of The Huffington Post, if the Bush tax cuts are not renewed, it is projected that over 10 years the deficit would be reduced by about 1 trillion dollars.  

The Democrats want the Bush tax cuts to expire on the wealthy but will renew it for those making less than $250,000. Paul Krugman, a well-known economist, once stated, “Wealthy Americans who benefit hugely from a system rigged in their favor react with hysteria to anyone who points out just how rigged the system is.” In reaction to the Democrats’ proposition, the Republicans are threatening to vote against it if it came down to Obama winning and moving forward with that plan.   As we’ve seen from Clinton’s presidency, allowing the wealthy to pay more in taxes will help the economy in the long run because it will lower the deficit and help create more jobs, all in all creating a good economy.  

The Republicans are opposing the Democrats’ view and actually want to renew the Bush tax cuts on all classes. The Republicans believe that if it were to be renewed only for the lower and middle class, like the Democrats want; it would affect economic growth and job creation, referring to the “trickle down”.  As we have seen from past, attempts of placing more money in the hands of the rich in order to create more jobs and get the economy growing has not worked, so what would make it any different now?

Last Edited on November 16, 2012.

References

Bradford, Harry. (2012. Aug. 8) Bush-Era tax cuts will cost U.S. nearly $1 trillion over the next decade.  Retrieved from <http://www.huffingtonpost.com/2012/08/24/bush-era-tax-cuts-revenue-expire_n_1828657.html#slide=1428571>

Gale, William and Harris, Benjamin. (2008. Jan. 23). How did the 2001 tax cuts change the tax code? Retrieved from <http://www.taxpolicycenter.org/briefing-book/background/bush-tax-cuts/2001.cfm>

Gale, William and Harris, Benjamin. (2008. Jan. 23). How did the 2003 tax cuts change the tax code? Retrieved from <http://www.taxpolicycenter.org/briefing-book/background/bush-tax-cuts/2003.cfm>

Garofalo, Pat. (2012. July. 9). Why letting the bush tax cuts for the rich expire will not hurt the economy .  Retrieved from <http://thinkprogress.org/economy/2012/07/09/512741/charts-economy-bush-tax-cuts/?mobile=nc>

Jobs and Growth tax relief reconciliation act of 2003. In Wikipedia. Retrieved from <http://en.wikipedia.org/wiki/Jobs_and_Growth_Tax_Relief_Reconciliation_Act_of_2003>