Misconceptions on Capital Gains Tax

Hilary Clinton has declared that she intends to double the rate of capital gains tax for investments that have been held for less than six years, a move which has been criticized by many.

What is capital gains tax?

Individuals and corporations are required to pay tax on the total of all their capital gains. The rate in which they pay in tax depends on the amount of time the investment was held and also on the investors’ tax bracket.

Short term capital gains are investments which have taken place for a year or less, and investors’ ordinary tax rate help set the price.

Long term capital gains are investments which held for over a year and the rate for this is lower than for short-term capital gains.

What is Hilary Clinton proposing?

Hilary Clinton, the Democratic presidential candidate, has offered to change capital gains tax.

Instead of capital gains being a two-tier system, as it currently stands, Clinton is proposing a multi-tier system.

• Earnings of over 1-2 years would be subject to a rate of 39.6%
• Gain which took place for 2-3 years would have a rate of 36%
• After that, the rate would then decline by 4% per year
• The decline stops at six years when a long-term rate of 20% then applies

The proposal has been designed to deter short-term investments and encourage more long-term investments, something which Clinton believes is lacking.

As appealing as the new proposals may be, it doesn’t take away from the fact that the higher the tax for something, the fewer the people will participate.

There are fears that by increasing tax on investments, new investors will be put off investing in new businesses. New business encourages new job growth. There is currently a slump in new businesses and job growth and a small investment, and participation rates are key reasons for this.

The most commonly misunderstood tax is the Capital gains tax, and there are a lot of misconceptions surrounding it. Hilary Clinton has given many reasons for why her proposals would be good for the economy and American citizens.

If you examine Clinton’s misconceptions one by one, however, they paint a different picture, a picture which shows great ignorance on Hilary Clinton’s part.

Below are some common confusions over capital gains tax.

Capital gains tax is lower than the tax on working class earnings

Capital gains mainly come from sales of financial assets. Public companies, on the other hand, pay a corporate income tax at the rate of 35%, capital gains tax would be another tax on that income on the sale of stock.

Capital gains tax is calculated on the increased value of stock and not an inflation adjustment. In times of high inflation, any increase can be seen as illusionary based on the fact that the gain is due to inflation.

Investors are required to pay tax on all their capital gains. However, they are only required to deduct a small share from their losses. This little stock can have an effect on tax codes.

Raising capital gains tax will help in gaining Billions of dollars

An increase in capital gains tax is unlikely to result in any financial growth.

In 1986, the rate rose from 20% to 28%. This increase resulted in revenue falling from $44 billion to $27 billion by 1991. When the rate was increased back up to 20%, this led to the revenue increasing from $54 billion in 1996 to $99 billion in 1999. 

Raising capital gains tax will help make people pay taxes better

Despite assurances that raising capital gains tax would increase the tax bill for the wealthy, the reality is that those who can, are most likely going to hold their assets to avoid the high tax penalty.

This rise in tax is probably going to hurt those who cannot afford the penalty.

Raising capital gains tax will not hurt investments

If investors believe that the risk of investing is too big, then they will not invest. Raising capital gains tax will add to the risks which put investors off. History has shown that investments in new businesses are lower at times when capital gains tax is high.

Instead, we need to be encouraging new investors into the markets, not putting them off by introducing more risks.

Raising capital gains tax will boost the economy

Capital gains tax will hurt small businesses, American competitiveness, and workers. America already has one of the highest corporate tax rates in the world.

It has been proven that high tax rates do not always equal higher economic growth, and capital gains tax is one of those which don’t.