Since 1921 when a special rule was provided for capital gains, how such income should be taxed has been a topic of regular debate in Congress and among others. The Congressional Budget Office's Budget Options, Vol 2, released in August 2009 includes as a revenue option, maintaining the current 0% and 15% rate structure for capital gains. [See page 180-181 of the CBO Report.]
One argument is to alleviate the double taxation of corporate income. Counterarguments include that a lower tax rate for capital gains favors higher income individuals who have more of this type of income than do average taxpayers.
What do you think? How should this debate over how to tax capital gains be structured - what are the important points? Are there alternatives? If taxed as regular income, what should we do with capital losses - should they be usable against any type of income?
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President John F Kennedy said that "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".
Capital gains are gains realized from the sale of capital asset such as Shares of corporate stock, land or building and or even a painting. Most capital gains are taxed at a lower rate of 15%. The reduced rate is set to expire in 2011 and the maximum capital gains rate will revert to 20% in 2011 unless it is renewed.
Currently, Ordinary income tax rate is 35% and long term capital gains tax rate is 15% only for individuals. C Corporations pay the regular corporate rates on the full amount of their capital gains and may use capital losses to offset capital gains. Capital losses cannot be used to offset any ordinary income.
Lower tax rate offsets taxes paid at the corporate level and also prevents taxpayers from holding the assets for a longer period especially for tax purposes. However, there is also a argument that lower capital gains disproportionately favors the wealthy as they have higher disposable income and also realized capital gains increases as age increases.
I think capital gains should be taxed at a lower rate not only to individuals but also to C Corporations. Policies can be structured in such a way that capital gains generated domestically will qualify for the preferred rate. ("Qualified capital gains" similar to qualified dividends"). This would promote investments and generate more cash flow into the economy. However, having too many rates violates the tax policy of simplicity. Lower tax rates on capital gains favor the high income individuals who employ financial techniques to convert ordinary income to capital gains.
Some of the advantages of having a lower tax rate for capital gain would be as follows:
• Wealthy would invest more into the economy for preferential rates and thereby increase the tax payments
• People will invest more into the stock markets when the rates are lower and hence the stock market will do good and in turn, the economy will also perform better.
• Promotes economic, job and capital growth for the country as a whole
• It will influence people to turn unrealized gains into realized gains
It would also encourage the law makers to consider the possibility of utilizing capital losses against ordinary income. Specifically, in the recent economic slowdown and market collapse, a number of companies are having huge capital losses and the fact that the capital losses can be carried forward only for 5 years would mean that many companies will be unable to utilize those losses. Of course, this would result in reduced revenue for the government. But looking at the bigger picture, allowing companies to utilize those losses will generate a higher cash flow and result in reinvestment in the economy and it will generate economic growth and once the company turns profitable, the IRS can generate revenue via taxes.
Some of key points of interest would be:
• Qualified capital gains rate for domestic investments/receipts
• Allow utilization of capital losses against ordinary income and also provide reinvestment plan/ideas
• Lower capital gain rates promote economic and job growth
• Generates more cash flow in the economy.
HENCE, CAPITAL GAINS SHOULD BE TAXED AT A LOWER RATE
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