One of the biggest fallacies generated by the rich and perpetuated by conservatives is the idea that the Capital Gains Tax (CGT) rate is an important component of a healthy economy.
One of the biggest questions surrounding the CGT rate is why money earned for investing in the stock market should be subject to a different tax rate than money earned for actually working and receiving a pay check. This is a clear example of the government picking the winners and losers. Those who can make the bulk of their money in stocks are the winners and those who have to work for a living are the losers.
Nowhere is this more evident than the IRS report showing the richest 400 Americans earned 81.3% of their income from capital gains, dividends and interest while only earning 6.5% from salaries and wages.
It should also be noted that the only time a company ever receives any money from the sale of stocks is in the initial public offering. Every trade after that is no different than selling a used car. The money goes to the seller, not the manufacturer.
That is not to say there is no value in the stock market. Clearly if you are an investor your goal is to buy low and sell high and you need other buyers to consummate those transactions. But acting like eliminating this tax loophole will suddenly halt all capital investments ignores reality.
For example, the short term CGT receives no special treatment from the IRS and is taxed at the same rate as other income. Today the fastest growing method a stock trading is something known as High Frequency trading where computers make thousands of trades every second. It is estimated that High Frequency trading now accounts for around 70% of the total trade volume.
This buying and selling of stocks within minutes is all taxed at the higher short term CGT rate. If the meme of CGT rates affecting investment were true, we would see a massive shift toward long term holdings, but the complete opposite is true.
The reason for this is the return on investment. Even if you pay 35% on all of your profits there is no easier way to get such a high rate of return. As an added plus, even if your investment goes bad the government subsidizes your losses with a tax break.
Even Ronald Reagan realized the issue with the CGT loophole when he stumped for his tax reform act of 1986, which raised the CGT rate to the same as other income.
“We’re going to close the unproductive tax loopholes that allow some of the truly wealthy to avoid paying their fair share. In theory, some of those loopholes were understandable, but in practice they sometimes made it possible for millionaires to pay nothing, while a bus driver was paying ten percent of his salary, and that’s crazy. [...] Do you think the millionaire ought to pay more in taxes than the bus driver or less?”
Of course words of wisdom from an iconic conservative and data showing that lowering the CGT rate has no affect on economic activity does nothing to dissuade Republicans from believing in this fallacy. Their blind faith actually has them clamoring for a complete elimination of the CGT. This should come as no surprise since over 90% of stocks, bonds and mutual funds are held by the top 10%, who are generous with both their opinions and money around election time each year.
In the end if Republicans are hell bent on defending these robber barons with gratuitous tax loopholes and characterizing them as “job creators” then it should come as no surprise when Democrats respond with the Robin Hood-like redistribution of wealth tactics in an attempt to level the playing field – the political equivalent of an eye for an eye.