Obama and the capital gains tax

I encountered a new scare tactic that the Republicans are using to frighten rich people about how much that crazy black radical's going to raise their taxes.  It involves the capital gains tax.  I learned a lot while researching it so I thought I'd share in case any of you come up against this. 

The capital gains tax is just what it says: a tax on whatever capital (profit) you gain during the tax year.  (This should tell you right away it's mostly a rich people thing.) Say you have some stock you bought at $1 per share and in 2008 you sold that stock for $21 per share.  Your capital gain/profit is $20 per share.  NOTE: It doesn't apply until you sell it.  It also applies to other things like real estate and such (although I think it doesn't apply to your homestead just investment properties --again, it's mostly for those wealthy enough to have investment properties, not your average Joe working at Wal-Mart.)

Before we go any further I should point out the obvious: Not many people are taking in a lot of capital GAINS right now.  Most people have capital LOSSES at the moment (just take a look at your 401K lately) so all this is moot.  But nonetheless...

The rumor goes like this: The current capital gains tax is 15%.  McCain wants to cut it 7.5%.  Obama wants to raise it to 28%.  Obama is a radical socialist!

Well here's the truth: The capital gains tax rate varies based on a variety of factors: how long you've had the asset that you sold and what income bracket you fall in.  If you fall into one of the lower income brackets say, in the "10% or 15% federal tax brackets (for tax year 2004, up to about $58K for married filing jointly, and less for others)" the tax rate is 5%.  If you're already quite wealthy though, and you make a lot of profit that year "Long-term gains are taxed at 15% if you fall in one of the higher income-tax brackets (e.g., 25%, 28%, and so on). [Source: http://invest-faq.com/articles/tax-cap-gains-rates.html].  So the Republican's argument is clearly aimed at the tax rate for capital gains for the wealthy, not for everyone who has capital gains.

But let's put this all in perspective.  It turns out that actually the rate on capital gains for the upper class was 20% throughout the 1990s.  Democrat Bill Clinton LOWERED it from its previous level of 28% which that radical socialist Ronald Reagan instituted in the Tax Reform Law of 1986.  Sorta blows up everything you thought you knew about Democrats and Republicans doesn't it?   It turns out that in this case it's McCain who's the radical who wants to lower this tax for the very rich to unprecedented levels.  The man would bankrupt the country. My, my, how it all comes into perspective now!

But I digress.  So how did this tax get to its current level of 15%?  Bush cut it down that far in 2003 to benefit his wealthy campaign donors so 15% is more an aberration than the norm.  But that's not all, this rate has a sunset provision set to expire in 2011 unless Congress renews it (not likely with the Republicans out of power).  So in 2011 the rate's going back up to 20% anyway even if Obama does nothing.  Hopefully though we won't have to wait that long.  Our government is 4 trillion dollars in debt thanks to Bush; they need the money.  Obama will hopefully raise the rate back up to where it belongs long before 2011.

What's the upshot of all this?  Even the well-off hardly have much to fear from an Obama presidency.  We're quite far from socialism here.

To even be worried about the capital gains tax at this moment when the economy's in the tank is and most people are losing money not gaining it, is just one more example of how out of touch Republicans are.

Comments

[joeschmitt]

I'm familiar with capital gains taxes, not because I pay them a lot, but maybe because I was an economics major back in the day. I thought I'd clarify your point about capital gains on your home. You do pay taxes on capital gains, however, only for gains above $250K ($500K for married) as long as you've lived in the home for the last two years. While that may have come up occasionally for non-rich people in the earlier part of this decade, it's unlikely it's happening now. Good post.

[Moderate Republican]

I personally prefer a National Value Added Tax as opposed to having a Capital Gains Tax...but that's just me...

--Moderate Republican

[SomePoster]

Another key point to make that before Ronald Reagan was in office, the highest income tax bracket (on paychecks) was at 70%. He lowered it, I believe, to 35%. Look at the early 80's, the stock market took off.

Even though people with a lot of disposable income are typically investing in the stock market, it isn't exclusively for the rich. Many middle class (lower and upper) have stock holdings as well. So the capital gains tax does not just affect the rich. I myself am in the "working poor" social class and I have owned stock.

More people than you might think actually own stock. Due to 401(K)'s and IRA's roughly 45% of Americans have a stake in the American economy. The concept of owning stock is not just for the rich. Discount brokers with cheap commissions saw to that. Also 401(k)'s and IRA's are taxed as soon as you remove the money as well. So these taxes do cross social class boundaries.

There is also something called the Laffer Curve. In economics this basically states that depending on where the tax percentage is, you can actually lower taxes and increase government revenues.

You can look at it here:
http://en.wikipedia.org/wiki/Laffer_curve

[Moderate Republican]

Its sorta like a reverse sales tax...instead of it being charged to consumers like a sales tax it is charged it charged to business...

e.g. from a book on the subject: A Wiget manufacturer pays $1.10 ($1 + $1x10%) for the raw materials, and the seller of the raw materials pays the government $0.10.
The manufacturer charges the retailer $1.32 ($1.20 + $1.20x10%) and pays the Government $0.02 ($0.12 minus $0.10), leaving the same profit of $0.20.
The retailer charges the consumer $1.65 ($1.50 + $1.50x10%) and pays the government $0.03 ($0.15 minus $0.12), leaving the profit of $0.30(1.65-1.32-.03). consumer has paid 10% ($0.15) extra, compared to the no taxation scheme.