Wednesday, September 26, 2012

The Deception of Capital Gains

I could rant on this topic for hours, but for now, I'll focus on one point. Capital Gains tax rates are lower, typically far lower, than the average tax rate. This has been rationalized as being acceptable by saying that since you're investing in the growth of businesses, you should be rewarded or by saying that it encourages investment which in turn fuels business growth.

Don't believe it

What it actually does is reduce the tax rates for wealthy people. Now before you immediately stop reading and think I'm just spreading propaganda or anti-republican party BS, think about it. The only people that could really benefit from the lower rates are people that have extra disposable income. If you're living paycheck to paycheck and worrying about putting food on the table, you don't have extra money to invest in another business. In order to invest, you have to have at least some disposable income. Many or most middle class families make enough to invest some of their money, but most are investing in retirement plans and saving for the future. Retirement plans have their own tax incentives, but don't benefit from capital gains rates because they're separate. The beneficiaries of capital gains rates are those that have enough money to "make their money work for them" and use money to make money.

Don't you wish you could do that? Sounds like a great deal.

So basically, capital gains rates only apply to money that is made using money that you already have, and theoretically could afford to lose. Considering this type of income can only be made if your wealth increases and you only get taxed on the gain, not what you put in, do we really need to incentivize this behavior?