Taxing Capital Gains As Ordinary Income

-Submitted by David Drumm (Nal), Guest Blogger

When politicians frame the debate on taxes, higher income taxes on the wealthy are always preceded by the descriptor “job-crushing” and lower capital gains taxes “encourage investment.” Investment is often used as the justification for a tax rate of 15% on capital gains, monies from the sale of stock, and dividends, which are now included in the 15% bracket. For the wealthy, those making $379,150 and above, ordinary income is taxed at 35%.

Is this “investment” justification backed by the data?

The above graph shows the capital gains tax rate in red. Real business investment is plotted in blue. The figure shows a lack of correlation between the bouncing red line and the steadily increasing blue line. High capital gains tax rates don’t discourage investment and low capital gains tax rates don’t encourage investment. As Warren Buffett said:

I have worked with investors for 60 years 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.

Another argument used for low capital gains tax rates is that many middle-class investors are benefited by the lower rates.  However, figures show that 70% of the benefits of capital gains tax cuts go the richest 1%. The poorest 60% of Americans get only 2% of the benefits. In reality most of the middle-class investment in stocks is in the form of 401 (k) plans that are tax deferred until retirement. At retirement, they are taxed as “ordinary income,” and don’t benefit from the tax cuts for capital gains and dividends.

But, wait. Aren’t corporate profits taxed twice, once as corporate income and then again as dividends? It’s hard enough to get corporations to pay tax once let alone twice. Two-thirds of all dividends are paid out to tax-free entities such as pension plans and other retirement vehicles. The logic of the “double tax” argument should also apply ordinary income that is taxed again when purchases are subject to sales taxes. Ordinary wage earners get taxed twice when their wages are taxed for FICA and the same wages are taxed as federal income.

It’s time to tax the non-workers the same as the workers.

H/T: Kevin Drum, Jared Bernstein, Citizens for Tax Justice, The Seattle Times.

40 thoughts on “Taxing Capital Gains As Ordinary Income

  1. “But the way Obama is handling his affairs makes one want to vote for the other guy….or just not vote…”

    AY,

    I agree with you, but while he angers me, his potential opponents scare the hell out of me.

  2. Mike S.,

    That is the crux of the situation….Folks here have the mentality of I ain’t voting for you… Im voting against the other guy….I am afraid from the people that I know that voted for Obama will just not vote this time…Which in of itself is not a good result…I agree that we will have more corporate run Theocracy’s than we can handle…

    But the way Obama is handling his affairs makes one want to vote for the other guy….or just not vote…

  3. In 1968 many progressives simply didn’t vote because Hubert Humphrey was a part of the LBJ Administration which escalated the war. RFK and MLK had been killed and the disaffection was palpable. Nixon became President, by a narrow margin and proceeded to escalate the war well beyond LBJ. He also rolled back many of the gains in civil rights and engendered the beginnings of our present modern police state.

    There is no Republican in the field that will do anything but increase the pain of most Americans as they struggle to keep their heads barely above water. I am quite angry with Obama, but having lived through past history, with no primary challenger or viable third part candidate, I may have to vote for him. Remember, just when you thinks things are pretty bad, they can even get quite worse. Many Republican candidates will help set up a Corporate run Theocracy if elected and as bad as things are now, we all could be leading much worse lives then.

  4. Apparently there are folks that don’t think Independently and go along with the flow rather than stand out…..I think voting for Nader stated that I don’t just go with the flow….I think before I vote…and if Perry is the GOP nominee and Obama is the nominee of the Godless then, I either have to vote for a 3rd party candidate or do like a lot of folks will either do, hold your nose and vote for Obama or just not vote…I bet there are more folks than don’t vote than hold their nose…..I will definitively Vote….but by being informed….

  5. One thing is for certain is that Huntsman won’t be the nominee. It is probably going to Rick Perry running around calling every democrat “godless”.

  6. Posted previously, apparently it needs repeating:

    “Anonymously Yours
    1, August 28, 2011 at 9:18 am
    Warren Buffet has apparently made a lot of investment decisions in his course of life…I bet he has better experience in this field than the rest…Ok, so he has a fortune..So, why not listen to sage advice….Thanks nal…”

    So far Huntsman is the only GOP candidate that has any degree of intelligence and apparently the backbone to stand up for his convictions….

  7. Wonder what programs for the not so wealthy Huntsman plans to cut so the wealthy can keep even more of their money. Buffett has the right idea not Huntsman.

  8. Sometimes good candidates have not so great ideals. But then what’s the choice? So far no one is in the GOP race announced that is better than Huntsman. If you think so, then I’d check my moral compass.

    What has Obama really done other than get more wishy washy than Carter. However, Carter was smart , just not politically savy.

  9. “Correct, I am just talking about someone who put money away on their own. Although I wonder if that even happens anymore.”

    Roco,

    The sad fact is that conservatively 75% of people don’t have enough income to put money away on their own, if indeed they even have discretionary income to save. The overwhelming majority of people live from paycheck to paycheck, with the wealthier of them perhaps have two months income set aside. One can talk all they want about the responsibility of people to plan for the future, but to do that they need enough income to even think about investment.

  10. roco

    as far as you being a paid troll, i don’t think it’d work. you tend to post what you believe, when you are getting paid to troll post you gotta take whatever position massa tells you.

  11. Nal:

    Correct, I am just talking about someone who put money away on their own. Although I wonder if that even happens anymore.

  12. Roco,

    As mentioned in the post, 401(k) monies are taxed as ordinary income, not at the capital gains rate.

  13. Investors are anyone who has a 401k which means quite a good many of us.

    thats the thing, it isnt only the rich who will benefit from a reduction in capital gains. What about the person that saved their entire life and have $500,000 in a mutual fund for their retirement? If they make 6-8% on their money which would be $30,000 to $40,000 per year an increase of 5 to 10% would be a tidy sum; anywhere from $1,500 to $4,000 annually.

  14. As someone who is currently in the position of having to sell stocks for living expenses, I’d be in favor of taxing capital gains as ordinary income. This year, that’d make the virtually tax-free, for my household. Good ol’ long-term unemployment…

  15. Now as far as the stock market goes I have always considered that to be gambling, though less honestly regulated than that at a normal casino. Brokers are the equivalent of card dealers, with a healthy dose of car salesman thrown in. If we tax someone’s winning $10,000 at Blackjack as normal income, it’s only fair to do the same for investors in the Stock Market.

  16. I’ve never suspected Puzzling of being a paid troll he is far too eclectic in his views, even though I disagree with many of them. I don’t suspect you either, Roco, although you know we are constantly at loggerheads.

    As far as “Capital Gains” from the moment I first learned anything about economics they have always seemed to me to be a phony way of giving tax advantages to the wealthy. To define one class of income as being protected in the sense it merits special tax rates is unfair and a boon to the already wealthy.

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