talk_politics: Capital gains

Here there was a post about a capital gains tax rise being "suicidal."

And I said that the capital gains loophole actually hurts growth.

Well, which is it?

Capital gains is basically just interest. Let's try an example under US law. I'm not an accountant, so I'm probably going to get some details wrong, but I'll try anyway:

If I lend you $300 at 5% interest per annum, and you pay me back $315 at the end of the year, I made $15. That's short-term capital gains, and is taxed more like regular income, so (let's pretend I do this for a living and am already paying the top rate) I owe about 30% of it. So I made (roughly) $10 off the deal and the government made $5.

But if I lend you $300 at 5% interest per annum, and you pay me back $345 in about three years, I made $45. That's long-term capital gains, so even at the top rate, I only owe 15%. So I pay the government about $7 and clear $38 profit.

I get to keep a higher ratio of the interest because I let that particular loan mature for more than year. That's the only reason.

But if the top rate were the same as for short-term gains, I would pay the government $15 and keep $30. Would this harm growth?

Well, the lower rate is an incentive for long-term capital loans, and a tax reason not to demand one's money back so soon. That's it. Bringing long-term capital gains tax back in line with other taxes hardly seems to be the great economic distorter the Steve Forbes types claim it would be.

Now, let's be clear. Under US law, there are four different kinds of capital gains, and each has a personal exemption--an amount of capital gains income that is untaxed. If I don't lend much money, or buy much stock, and I make less than that exemption for each, I wouldn't even have to report it to the IRS as income, really. (I probably should, but since I don't owe anything, it's not a crime if I don't. [I am not accountant, don't take my advice on this.]) So my $45 is not going to be taxed if it's the only capital gain I made that year.

The real question is, what about someone who's lending $3 000 000 000? We can call it "buying bonds" or "investing in stock," but that's what he's doing. If he makes $450 000 000 profit, he's well into the top bracket. Do we really need to give that guy a deal where he pays a 15% rate instead of something in the 25%-35% range? Is incentivizing long-term loans really that good for the economy, that we should give up almost half the tax revenue?

Now, I said it was bad for growth. Maybe that's wrong. But I think it's dangerous to have too much money going into the hands of the lender/investor/owner class on a regular basis. If our tax code favors investors over those they invest in, we may find we are underpaying the actual workers and engineers in favor of a super-rich moneyed class. And history supports the idea that very high concentration of wealth eventually undercuts demand and crashes the economy, as in 1929 and 2008. But maybe I'm making too much of a correlation between the tax code and the wealth disparity in my country.

Source: http://talk-politics.livejournal.com/1604581.html

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