Quote:
Originally Posted by Mathgod
Fair comment. I'm all for people paying taxes on capital gains, as long as those gains are actual real gains in buying power. Imagine for a moment if Jack's property value increased at only the level of inflation. He sells the property, and has the exact same amount of buying power from its sale as he had 50 years ago prior to buying it. He essentially gained nothing from the "increase" in property value. Yet he has to pay tax on that "gain". Am I the only one who thinks it's a bit odd that there are real taxes on imaginary gains?
In my view, yes we need to increase taxes on the rich. But this isn't the way. IMO.
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Gains that match inflation aren't imaginary though. If someone put some money in a savings account for 50 years that had an interest rate that matched inflation, they'd pay tax on the interest every year. So why should capital assets be different?
Yes, getting hit with it all at once when you sell can lead to the income ending up in higher tax brackets. But capital gains taxes have other advantages that normally more than make up for that:
1) You only pay tax on half the gain.
2) Tax is deferred until you sell. So the value compounds to a larger amount than if you had to pay taxes on it each year.
And with large gains, the difference can be pretty big. If you had an investment that returned 10% a year for 25 years, if each year's return was treated as regular income and taxed in that year, you'd end up with about $575K at the end assuming a 30% tax rate. If it was all treated as a capital gain at the end of 25 years, you'd end up with about $860K with a 48% tax rate.