Capital Gains Tax Rate – Just Leave It Alone

There has been a lot of talk about the tax rates of Warren Buffet, Mitt Romney, and President Obama.  Most people don’t remember this, but when then Senator Obama ran for office, he said was going to pay for all his campaign promises by ending both wars (Iraq & Afghanistan), increasing taxes on the rich (by letting the Bush tax cuts expire), and increasing the capital gains tax rate.

Income made on investments get taxed at a 15% rate vs. income from a job, which reach as high as 35%.  However, when Obama got into office, there was a recession going on, which crushed our stock market.  Essentially, there were little capital gains to tax, they wanted to encourage people to invest in companies, and a tax hike on capital gains in his first year during a recession would have been toxic politically.

Now that the dust has settled and we are seeing a small recovery, President Obama wants to increase taxes on capital gains and on the rich as he goes back into campaign mode.  Adversely, some Republicans and conservative blogs say that we should get rid of capital gains to increase the incentive to invest in the marketplace.  I believe the government does play a role in producing an environment that promotes economic growth, but they also need to be careful about putting too big of incentives on either side so as not to disrupt the balance of reasonableness and the power of the free market.

I do not believe we should increase the capital gains tax rate because for the majority of Americans, it is double taxation.  We get taxed when we earn income from our jobs, and then that money gets taxed again if we make any money with it on an investment (note: that same money gets taxed a third time when you die).  Further,  I think it is good to have an incentive (lower taxes) for people to invest in companies.  Financial investments in corporations lead to hiring, innovation, and profits.

It is not good policy in my mind, to promote too much risk by having a 0% tax rate on capital gains.  Too many people would try to make all of their money on investments so they do not have to pay taxes, which could be dangerous at the macro level.  Investing in the stock market is no guarantee and can be extremely risky.  If you don’t believe me, ask the thousands that had to come out of retirement because their portfolio shrunk to nearly nothing when the recession hit.

The current 15% capital gains tax is fine in my mind — not too high, not too low.  I definitely think we can talk about capital gains tax rates if we are talking about restructuring the entire tax code, but it is a low priority topic right now in my mind.