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Benefits of Cutting the Tax on Investment Gains
What are the benefits of reducing the tax businesses and individuals pay on profits from investments? Such a tax is levied on the capital gain, which is the difference between what was paid for an investment and what the investment sold for.
Such investments could be real estate, stocks, bonds, precious metals, mutual funds, and collectibles. If an investment was sold for more than the purchase price, there is a gain that must be reported to the IRS and is subject to a capital gains tax, and if it is sold for less, there is a capital loss that also must be reported.
While some in Congress are opposed to a capital gains tax cut as a tax cut for the "rich," many conservative Republicans and centrist Democrats say there are many advantages to such a proposal including job growth and increased tax collection from the rich. They also believe the tax affects the lower income in an even greater way than it does rich business owners. We examine the potential advantages of such a tax cut.
Those who sell their homes are subject to a capital gains tax if the property is sold for more than their original purchase price some exceptions for a variety of factors including job loss or natural disaster.
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Job Creation is One Advantage
Some financial experts say cutting the capital gains tax would increase investment, which would lead to new jobs, many of them in inner city or economically disadvantaged areas. They believe this because when the tax on capital gains is too high, business leaders have fewer incentives to start new businesses or hire new workers.
Many believe if the taxes were lower on business start-ups, materials needed for a new plant, new equipment for existing firms, stock purchases, and other types of capital gains, more of these types of purchases would be made. Some say such investments are the key to a higher living standard for everyone as well as increased national output. A capital gains tax cut could release hundreds of billions of dollars by businesses for investments.
"The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital . . . the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy," President John Kennedy once said.
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It Might Generate More Revenue for the Federal Government
While some are opposed to cutting the tax on capital gains when the government is facing massive deficits, others believe such a move would actually bring in more money for the government and possibly even lower the deficit. That is because such a tax cut could spur economic growth and bring in more capital gains to more people. Business people would then have to pay more taxes on such gains even if at a lower rate.
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It Might Benefit Everybody not Just the Rich
Many conservative financial experts believe a high capital gains tax hurts everyone, not just the rich. They point out the tax currently affects low and middle income taxpayers, especially the elderly, in a far greater way than the rich.
They point out such people have less control over their capital gains than the rich, and that most people who report capital gains do not have a high income. In addition, the wealthy have more means to avoid high taxes than low or middle income people. The wealthy often pay far more on capital gains when such taxes are low than when they are high.
Many financial experts believe that when tax rates are high, businesses are more likely to invest, if at all, in "safe" investments. When rates are low, however, they are much more likely to invest in "riskier" projects. Much more money will be invested in inner cities and disadvantaged areas.
Again, President Kennedy said, "a rising tide lifts all boats."
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Cutting the Capital Gains Tax Would Remove Double Taxation
Some believe the current tax policy provides for double taxation. This is because businesses are taxed on their profits by a corporate income tax. They are then taxed on their capital gains too. Conservative experts believe this discourages investment and hurts the economy.
For example, for every $100 a corporation makes, it pays $35 in corporate income tax. If the corporation has had capital gains, the IRS might then take 20 percent of the remaining $65, which would be distributed to investors, or $13. That would leave investors with $52 in profits after taxes and the government with $48, or an actual tax rate of 48 percent if the corporation has had capital gains. Many conservative Republicans and centrist Democrats say it is no wonder such a corporation would not want to make new investments.
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This Tax Cut Would Stop the Current Policy of Taxing Inflation
Many believe the current capital gains tax is unfair because the much of the current tax is levied on gains due to inflation. Thus, much of the tax is not on real gains but inflationary gains. Many say it is not fair for the government to tax inflation.
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Many Say Only a Permanent Capital Gains Tax Cut Would be Beneficial
Many financial experts reject the calls of some to allow a capital gains tax cut for only certain investors and for only a limited time. They say such a cut would only block new investments and hurt economic growth. Many say it might or might not increase tax revenue temporarily but will not stimulate the American economy. Financial experts say that a permanent tax cut will allow people to sell assets that have been unproductive for a long time and to make new investments that will help the nation's economy grow. In fact, former Federal Reserve Chairman Allan Greenspan has said that capital gains should not be taxed at all.
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Wages Would Increase
Conservative financial experts say if businesses increase investments because of a capital gains tax cut, an increase in the number of jobs would only be one benefit to workers. They add that wages would increase as well.
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Some Experts Say Stock Prices Would Rise (Not Fall) After a Tax Cut
Conservative financial experts also reject the wisdom of some opposed to a tax cut who claim that stock prices would fall after a cut because people would sell their investments. They point out that when the tax was cut from 28 percent to 20 percent in 1997, stock prices actually increased by 8 percent.
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Many Financial Experts Conclude: a Capital Gains Tax Cut Has More Advantages than Disadvantages
Some reject the idea of reducing taxes on gains because they say that would only benefit the wealthy and would have little impact on the American economy. Others, however, reject that wisdom, because they say the benefits of a capital gains tax cut have helped the American economy grow in the past and affect everybody--perhaps the middle and lower class-- in an even greater way. Whether or not the rate is cut, there are ways to minimize capital gains taxes.
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References and Image Credits
Image Credit: US Currency Federal Reserve under Public Domain
Moore, Steven and Silva, "The ABC's of the Capital Gain Tax," cato.org
Author unknown, "Advantages and Disadvantages of Capital Gains Tax Cut," finance.indiamart.com
The Heritage Foundation, "Capital Gains Tax Cut: Myths and Facts," heritage.org
Author Unknown, "Corporate and Individual Tax Data," smallbiz.com