A capital gain, according to Investopedia, is “an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold.” Investments in this context include stocks, bonds, mutual funds and exchange-traded funds (ETF).
Capital gains are taxed at a lower rate than other income like salary, taxable benefits and interest income. Capital gains are also exempt from Social Security and Medicare taxes (also called FICA or payroll taxes).
The federal government gives special tax treatment to capital gains to encourage people to take risks with their money by investing in ventures that could produce jobs and wealth for society. The government distorts the marketplace by lowering the cost to invest. It does so to help our society by encouraging the creation of jobs and wealth.
All well and good, but what does most of the buying of stocks and all of the trading in investment hedges like puts and calls have to do with creating jobs?
When you buy the stock of General Electric or a bond of Wells Fargo Bank you are not helping the company one bit, unless you buy it directly from the company. But most stock is bought on secondary markets such as the New York Stock Exchange or NASDAQ. In all trading of stocks and bonds and all hedging strategies, you buy from someone else or sell to someone else. The company gets no additional money.
Now companies do from time to time issue stock or float bonds, and the people who buy them deserve a tax break for helping companies expand or develop new products, all of which create jobs and wealth and meet societal needs. And even before a stock is public, people invest privately, usually buying shares or loaning money. These people all deserve a tax break. I have no problem with that.
For that reason, I propose that we change our tax law so that only when all the funds to buy the security go directly to the company (less fees to investment bankers, to be sure), will the investment qualify for the capital gains rate when the investment is sold.
Many people are already paying taxes on capital gains at the rate of income taxes if they have traditional IRAs. When you take money out of a traditional IRA (or exchange the IRA for a Roth IRA), you pay both the tax-deferred investment amounts and all capital gains as income, and not as capital gains. I’m guessing that most people have all or almost all of their stocks, bonds, mutual funds and ETFs in IRAs and so don’t care much about the capital gains tax break. But because there are strict limits on how much income you can shelter in an IRA, the wealthier you are, the more gains you will likely have that are currently getting the capital gains tax break.
Some will say that this move will kill the stock market and therefore make it harder for companies to find financing. My response: “Horse feathers!” People have to do something with their money, and so will still buy bonds and stocks on the secondary markets. They’ll just pay more of their profit in taxes, and why not? That money did not really help to create any jobs.
If we want to tax rich folk less for creating jobs, let’s at least make sure that they’re actually creating jobs with the extra money they have; for example, the extra billions our government leaders recently gave the wealthy by extending temporary tax breaks for another two years. You know, that $38.5 billion ripped from social service, educational, mass transit and other important job-creating programs in the latest federal budget.