Part of the reason for a lower cap gains rate is to account for inflation.
You could probably get 99.9% agreement with this pov. The only issue, however, it that eliminating SS payments from those with $10M or more probably won’t make much of a dent in the SS funding shortfall. It’s like ~1% of the population and many of those are still working, i.e., not receiving benefits, so the ‘savings’ from eliminating their payments is a virtual rounding error.
However, a large step-down at one year (treating an asset sold after 1 year + 1 day the same as one sold after 40 years) is a poor proxy for inflation-indexing the basis.
The current discounted capital gain tax rate also foregoes many times more tax revenue than having normal tax rates but with inflation-indexed basis for capital gains.
The main reason that capital gains have favorable tax treatment is likely because capital gains are a significant portion of income for the wealthiest, who have more political lobbying power.
“Part of the reason for a lower cap gains rate is to account for inflation.”
If this is the case, it would make more sense to have a reduced rate on interest income.
Except that inflation is somewhat accounted for annually as the tax brackets increase each year. Thus, the taxes on interest income is closer to real income vs. nominal, correct?
Sure, 366 days is arbitrary. But that is just messing with the details: 2 years? 5 years? Phase down over 10 years?
Just use regular tax rates for capital gains, but index the basis for inflation based on length of holding, so that “inflation capital gains” are not taxed, but capital gains beyond that are taxed at regular instead of favored rates.
For better or worse, US tax codes are geared to encourage investment. Right or wrong, long term capital gains is fruits of one’s investment, rewards for taking risks .Thus lower rate.
I’ve often thought this would be a better way to tax capital gains, but I’ve never seen any studies that calculate what affect it would have on total LTCG tax collections.
I feel like it might actually reduce them. Real (inflation adjusted) returns of price increases from 1950-2010 was 3.3% vs. a non-inflation adjusted return of 7.1%. So inflation over broad lengths of time eats up more than half of the gains, but current capital gain rates are a bit more than half (approximately) of earned income tax rates, which at first glance would appear to lower total LTCG revenue.
https://taxfoundation.org/economic-budget-impact-indexing-capital-gains-inflation/ suggests $148-180 billion over the next ten years (under otherwise similar rules, including the lower capital gain tax rates).
For comparison, the cost of the current lower capital gain tax rates is estimated to be $1.152 trillion over the next ten years, according to https://home.treasury.gov/system/files/131/Tax-Expenditures-FY2020.pdf (line 72 in the table).
The reason not to index probably applies more to the issue of opening the indexing door to everything.
In any case, there is a good reason not to tax “gains” at the same rate as current income since the risk level is completely different. Ask a bond investor.
That may have been more true decades ago when capital bore a substantially greater share of economic risks than labor, but now that most jobs (even government jobs) are more risky than before in terms of potential for disappearing with little warning, with retraining and often occupational licensing for a new job being more costly for the worker (due to more employers looking for already-trained employees instead of trainable ones for on-the-job-training), labor is bearing a greater share of economic risk than before, while getting a smaller share of economic gains than before.
Isn’t part of the reason for a lower capital gains rate to encourage people to actually realize gains and let capital flow to more productive uses? Otherwise you’d just avoid taking the gain and borrow against the asset to extract cash if needed.
That already happens, for example in housing where the step up in basis on death makes it better for seniors in expensive ZIP codes to hold onto their multi million dollar house, rather than selling it and paying tax on the gain over $500K. Lots of that here in the Bay Area, where you wonder why someone has a large horse paddock and you realize they are in their 80s and waiting to die so their heirs don’t pay tax on a field that they bought for $10K in 1970 and is now worth $5M…
Re: #14530
California real estate market is additionally distorted by property tax laws that discourage moving from an appreciated house. But that probably helps drive up the housing prices.
Indexing the basis for capital gains would benefit grandma with a house bought in 1970 more than the Wall Street plutocrat holding assets for a year and a day.
Hey @mom2collegekids did you ever think this topic would generate 969 pages of posts when you started this in 2014? Getting closer and closer to retirement, it is on our minds!
I have really enjoyed this whole thread and my circumstances have changed considerably since I first started posting here. I have just made the decision to retire at the end of August! I am planning to spend a year helping with childcare for my first grandchild, then may look into a part-time job or a “gig economy” type of position. We own our house and two cars free and clear, and have subsidized health care through husband’s work. I will have two small pensions, have SS to look forward to eventually, and have savings to supplement the pensions if inflation hits. It is probably not the wisest financial decision, but… I keep reading obituaries of people in their 60s passing away, and I want a little time to smell the roses before that happens to me.
What some senior citizens in Japan do when their pension or Social-Security-equivalent is not enough to live on:
https://www.bbc.com/news/stories-47033704
If You Do Medicare Sign-Up Wrong, It Will Cost You
https://www.nytimes.com/2019/01/31/business/medicare-enrollment-how-to-sign-up.html
^^yes, COBRA does not count as ‘actively employed’ at age 65.
However, there has to be something missing from this article since his part b & d premiums had to be less than his COBRA premium…unless his employer kept paying thier portion of his rate as a former employee (which is rare), remaining on COBRA is almost always more costly than Medicare.
I don’t think anything is missing from the article. He didn’t do a cost comparison. He just stuck with COBRA as long as it was available because it was available. I remember doing the same thing - sticking with COBRA instead of switching to private market insurance. Much to my surprise, when I did switch, the private market was cheaper.
From the article:
“I just thought, this is great — the coverage won’t change,” he recalled. “I was just relying on my own logic and experience, and felt that if I didn’t need a government service, I wouldn’t sign up for it.”
I think Medicare should fix the penalty. If the penalty is because of not paying into B for not signing up at 65, they should just make them backpay for the amount and and some fee. I get the feeling the current penalty is far more severe.
The penalty IS severe because Medicare works best at keeping cistsvlowest by forcing folks that are relatively healthy to buy it early to avoid the penalty they’d have to pay if they waited until they were older and sicker to buy in.