Avoiding the fiscal cliff with capital gains compromise
By: dgun
December 16th, 2012
8:23 pm
On January 1st, taxes are going up on everyone. All Congress has to do to make this happen is what Congress does best: nothing.
The President has made it clear that as part of any deal to avoid the fiscal cliff, tax rates must go up on upper income earners. Because of the approaching deadline, Speaker Boehner doesn't really have much of a hand to play. If taxes go up on everyone, Democrats will be able to play their favorite tune (you know, the one about Republicans representing the wealthy to the exclusion of everyone else) louder and prouder than ever before, and on a continuous loop for years to come. Furthermore, those automatic budget cuts will be cutting some stuff Republicans like. Whoever came up with such a ridiculous idea for this artificial deadline anyway?
Nevertheless, in order to get to a compromise and allow Republicans to save face, here is what I propose:
First, forget about the spending cuts for now. Or rather, give that can a good hard kick. We can dress it up as something other than "can-kicking", of course. Maybe use language like "an agreed upon framework for serious spending cuts".
Second, let regular income rates go up on the top 2% of earners to their pre-Bush rate, which I think is around 39%, while keeping the same rates for the rest of us. With capital gains tax, keep rates the same with one modification. Currently, long term capital gains are defined as capital gains made from the sale of securities held for one year or longer and is taxed at 15% for most people. Any securities held less than one year and sold for a profit are taxed at the individual's regular income tax rate. I suggest keeping the 15% rate but redefine it as a "middle-term" rate, that is profit from securities held more than a year, and creating a new long-term rate of 10 - 12% to be held a minimum of 2-5 years.
Other than allowing for a compromise, the main benefit of rewarding true long term investing is reducing short-term speculation, which should create a more stable market and ultimately increase returns for everyone who participates in the market. And if you have a retirement plan, you participate in the market.
Post Reply
8 comments on "Avoiding the fiscal cliff with capital gains compromise"
December 16, 2012 at 8:48 pm
This won't have the results you expect. The rates you are thinking of only apply when the income hits individuals. If memory serves vast majority of trade volume, both losses and gains, are taxed at a different level. Hedgefunds for example are usually LLCs and are taxed when a partner draws money out of it's earnings. Unless they are straight day traders, they'll be pulling out at the 15% rate.
December 16, 2012 at 8:53 pm
But wouldn't they prefer lower than 15%?
I couldn't find any good data on how much revenue is raised by capital gains tax. The problem I think is that it is all lumped together as income tax.
But one estimate I saw is that it has ranged in recent years from 7% to 12% (of revenue collected by IRS). Not sure how accurate that is.
December 16, 2012 at 8:59 pm
But wouldn't they prefer lower than 15%?
I couldn't find any good data on how much revenue is raised by capital gains tax. The problem I think is that it is all lumped together as income tax.
But one estimate I saw is that it has ranged in recent years from 7% to 12% (of revenue collected by IRS). Not sure how accurate that is.
December 16, 2012 at 9:12 pm
I think we encourage money shuffling enough as is. Finance as a portion of the GDP is far out of bounds. If the economy is a medium sized car, the tires are 60' made of solid gold and it's ruining the gas mileage.
December 17, 2012 at 5:25 am
Why shouldn't everyone taxes go up? Aren't we part of the problem? Know why no one brings it up? Because if you raise taxes on everyone, then everyone will demand spending cuts to bring their taxes down.
Its the LAST thing our government wants to contend with.
Mark
December 17, 2012 at 7:25 am
On January 1st, taxes are going up on everyone. All Congress has to do to make this happen is what Congress does best: nothing.
The President has made it clear that as part of any deal to avoid the fiscal cliff, tax rates must go up on upper income earners. Because of the approaching deadline, Speaker Boehner doesn't really have much of a hand to play. If taxes go up on everyone, Democrats will be able to play their favorite tune (you know, the one about Republicans representing the wealthy to the exclusion of everyone else) louder and prouder than ever before, and on a continuous loop for years to come. Furthermore, those automatic budget cuts will be cutting some stuff Republicans like. Whoever came up with such a ridiculous idea for this artificial deadline anyway?
Nevertheless, in order to get to a compromise and allow Republicans to save face, here is what I propose:
First, forget about the spending cuts for now. Or rather, give that can a good hard kick. We can dress it up as something other than "can-kicking", of course. Maybe use language like "an agreed upon framework for serious spending cuts".
Second, let regular income rates go up on the top 2% of earners to their pre-Bush rate, which I think is around 39%, while keeping the same rates for the rest of us. With capital gains tax, keep rates the same with one modification. Currently, long term capital gains are defined as capital gains made from the sale of securities held for one year or longer and is taxed at 15% for most people. Any securities held less than one year and sold for a profit are taxed at the individual's regular income tax rate. I suggest keeping the 15% rate but redefine it as a "middle-term" rate, that is profit from securities held more than a year, and creating a new long-term rate of 10 - 12% to be held a minimum of 2-5 years.
Other than allowing for a compromise, the main benefit of rewarding true long term investing is reducing short-term speculation, which should create a more stable market and ultimately increase returns for everyone who participates in the market. And if you have a retirement plan, you participate in the market.
First of all, look at the effective tax rates by income graph, you can google it easily. You will see how it is progressive until you get to the very top earners. That is because of the capital gains rates being lower. Long term capital gains (and dividends) should be taxed as regular income. Additionally, kicking the spending cuts can down the road does a disservice to the situation we are in. This "cliff" would only get us a fraction of the way to a 0 deficit, nevermind paying down the debt.
Please.. rethink this.
December 20, 2012 at 8:48 am
This is the single worst idea I have heard on this subject, bar none.
First of all, look at the effective tax rates by income graph, you can google it easily. You will see how it is progressive until you get to the very top earners. That is because of the capital gains rates being lower. Long term capital gains (and dividends) should be taxed as regular income. Additionally, kicking the spending cuts can down the road does a disservice to the situation we are in. This "cliff" would only get us a fraction of the way to a 0 deficit, nevermind paying down the debt.
Please.. rethink this.
I don't understand your objection.
Short term capital gains would go up because the basic income rate is going up.
Stocks held for a year would stay the same, 15%.
Profit on stocks held for a true long term period would drop.
There is a true benefit to this as it encourages true long term investing. Which is needed.
As to the budget, I don't think it will be that big of a hit. Revenue from capital gains tax varies but I think typically around 10% of taxes collected; the decrease in long term capital gains tax will be offset by the rise in the short term rate.
The republicans control the House. I think this is something that could work politically and would be a positive in the long run.
The exact details can be tweaked, but I think something like this gets us home.
December 20, 2012 at 8:56 am
Also the low effective tax rate of upper income earners is not entirely due to capital gains tax rate.