I don't see the economic argument that says tax labor that earns $50,000 per year, but don't tax passive income that earns a non working wealthy person $200,000 per year.
Well, here's the most obvious one:
Man buys property for $1,000 and holds it for ten years, at which time he sells it for $100,000, yielding a taxable gain of $99,000.
In effect, he has earned $9,900 per year for ten years. But it all is taxed in the 10th year because of the rules for recognition of income on the sale of property that require recognition in the year of sale.
Assume further the tax rate on the $9,900/year will be 15%, but the tax rate on $99,000 will be 30%, since all this income is earned in one year and will be taxed at a higher rate as a result.
Had he been taxed each year on $9,900 his total tax bill would have been (9900 * .15 * 10) = 14,850.
But, being taxed on the full $99,000 in the year of sale, his tax bill would be $99000 * .30 = 29,700.
So, by virtue of receiving his income at the END of ten years instead of ratably OVER ten years, he is effectively paying twice the taxes on the same gain.
Hardly a fair arrangement, and at least one reason long-term gains should not be taxed at the same rate as ordinary income.
If you go back to the committee reports for enactment of the discounted long-term capital gain, this is the reason you'll find Congress did it this way.
However, over the years, it was discovered there were other reasons, as well. In particular, the geniuses in Congress took a cue from B.F. Skinner, who no doubt believed that if you desire a certain kind of behavior, you reward that behavior with lower taxes. This was before Congress was comprised of people like this guy:
youtube.com
And in fact, Congress had some relatively smart people at the time, and they figured out that if we could get people to INVEST their money in capital assets, the economy would benefit. They would buy homes, commercial real estate, airplanes, cars & trucks, they'd invest in stocks which would support capital formation, they would buy corporate bonds which would finance economic productivity, they would use capital to start businesses and buy equipment, and all kinds of things that were good for the country. BF Skinner might have talked to some of them, but probably not, but they read his books, and they figured out that if they rewarded people by giving them favorable tax treatment on all these things, then Americans would be more apt to put their money into them.
So, in the end, there were multiple reasons for taxing capital gains at a lower rate. First, because it is fair. And secondly, because it causes people to invest money they otherwise would spend buying crap.
Later, they got even more aggressive, and decided, heck, if you allow them to sell their homes (a capital asset) and pay NO taxes, they would be much more inclined toward home ownership, which we think is a good idea. So, they invented Section 121 of the Internal Revenue Code, which allowed someone to sell a house to get money to retire and not pay ANY capital gain tax. Then, a little later, they decided if someone wanted to sell a home to buy a bigger home, that would be a good thing, so they made a rule that lets you sell a small house and buy a bigger one with the money and not pay taxes on the gain on the small house you sold. And suddenly, people started buying bigger houses.
Seeing how well this worked, they decided it would make sense to expand the concept for not just selling houses, but for TRADING certain real estate, so long as it was 'substantially identical'. So, if I had Property A and you had Property B, if we wanted to trade, we could, but it would be a fully taxable transaction. With this new rule, we could just trade and the rules are a little complicated, but whoever had the gain wouldn't be taxed on the full amount of it (but maybe part of it).
So, whenever Congress saw a chance to do something that would cause taxpayers to behave in a way that socially preferable, at least to Congress, they'd just give them a break on the taxes. Pretty soon, if you bought a new tractor for your farm, they'd give you a 10% tax credit, which caused farmers to run out and buy tractors all the time.
It might be they had some old buildings around that they wanted people to restore, so they decided the 10% credit wasn't enough and they created a fatter credit for that. So fat, in fact, that a group of partners could buy an old building and fix it up and get out of paying taxes for a few years with all the tax credits they got. And suddenly, people were going around LOOKING for buildings they could restore.
In the end, the tax code is more about behavior modification than it is about fairness. Reagan "fixed" it in 1986, and by 1993, the fixes were undone and we were back to the same-old, same-old. Now, you can't fix it unless you throw a lot of it out first.
It is a big fat bowl of spaghetti. |
