Investment Gains Taxes Increase - The Worst Tax Policy Ever?
Yesterday Paul Michael wrote an article comparing the income tax policies of McCain and Obama and suggested that he would vote for Obama because Obama's tax policy would benefit everyone but the uber-rich. In the comments on the article there are many great comments about the candidates' tax policies and how it is not so simple to say that Obama's plan is better. One particular comment that stuck out to me is about Obama's stance on doubling capital gains taxes, and I think that is possibly the worst tax policy ever, and here is why.
Capital gains taxes are assessed on every sale of "capital" we conduct. The capital could be stocks, funds, or a business. Currently, the capital gains tax rate on investments held for more than a year is 15%, and for investments held for less than a year the tax rate is the same as a person's ordinary income. What Obama is proposing is to raise the long term capital gains tax rate back to 28%. He says that he wants to do this "for purposes of fairness" in a debate.
I have no idea why Senator Obama thinks this tax increase is fair in any way to all the individual investors like you and me who are by no means super rich. Actually, I think doubling the capital gains tax would discourage people from saving and investing and that is a horrible thing in my book. When we put our after tax savings in investment vehicles like stocks and mutual funds, all we are trying to do is to beat inflation and protect the wealth we have worked for. Capital gains taxes is already a double taxation on gains of money that has already been taxed. When this tax gets nearly doubled, it is a bigger slap in the face for honest hard working people who are trying to save for the future.
Additionally, many retirees who are liquidating their taxable investments will feel the pain of this tax increase. For most retirees, it is not enough to just live off of IRAs, 401ks, pensions, and Social Security so many people have normal taxable investment accounts. Suppose a retiree saved up a nest egg of $150,000 of which $100,000 is long term capital gains, then this particular retiree will lose $13000 if the capital gains taxes were raised from 15% to 28%. This is a significant amount of money and could be worth several months of living expenses. Is it fair to punish these people who built up their nest eggs honestly and responsibly by investing?
In addition to raising capital gains taxes, Obama wants to raise the taxes on dividends significantly. This will have a similar detrimental effect in dwindling investment gains all across the board for all investors big and small.
So does Obama's tax plan really benefit the people with low and middle income as much as Paul's article states? Well, personally I have always said to everyone I know that your wealth is not about how much income you make, but how much assets you have. It is possible for a family to have a nice plush portfolio without making so much income every year as long as they are good savers and wise investors and these families will be unjustly and severely penalized under Obama's proposal. So I believe in the long run Obama's tax policies punish all those who try to build wealth by investing, and that is not very wise.