Capital Gains Are Ordinary Income to Many

During the last election cycle the issue of unique treatment of capital gains tax surfaced as it was determined that Mitt Romney and many other very wealthy Americans pay a lower tax rate than their secretaries because much of their income is derived from investments and not a salary. Those investments, if held longer than a year prior to their sale are taxed at 15% in most situations which is significantly less than the rate high income earners pay on ordinary income, usually around 35%. The rate is on par with the ordinary income level for a single tax filer who earns $8,926 – $36,250 annually based on 2013 rates.

What makes capital gains so special? A capital gain occurs when an amount received when selling an asset is greater than the amount paid for it. Sale of stock is the most common capital gain, however it includes almost any investment including bonds, real estate, equipment, and works of art but usually do not include personal use items. For tax purposes capital gains have been distinguished from ordinary income since 1913 though the rate at which they are taxed has changed several times since then. The drop to current level of capital gains tax of 15% was achieved through Bush II era legislation and represents the lowest it has ever been in US history. Though I don’t recall the Occupy movement ever claiming it as a specific gripe it well should have, and in 2011 Warren Buffett, one of America’s wealthiest (and most successful) investors, added to wealth disparity discussion when he claimed that the favorable treatment he receives on his earnings is unfair

A Rich Man’s Game

With a base in long-term investments capital gains disproportionately affect the rich, and luckily this is not a significantly disputed fact. However, it is my belief that this favorable treatment is unethical and detrimental to the collective welfare of our nation, which will be disputed by some. I propose that capital gains should be taxed just like regular income because after I disprove all the reasons the rich say it is necessary, all that’s left is an unfair mechanism which systematically helps rich to get richer.

The proponents of capital gains getting taxed lower than ordinary income rates usually do so under the guise that it sparks investment which sounds like it could be accurate. Lower taxes on an activity increases the propensity to do it, but it’s actually an argument based only on speculation. When you apply the policy to the behavior options of the investor the capital gains tax makes no difference in the level of investment.