Capital Gains Tax Laws: wrong for America

Capital gains tax laws controversy

Here's where it gets tricky. Controversy surrounds the capital gains tax amounts that individuals and corporations have to pay, because this capital gains tax actually brings in much less revenue for the federal government than most people think. In fact, the total collections during the 1990s averaged between $25 billion and $30 billion a year.

For the government, the capital gains tax payment represents 6% of personal and corporate income tax receipts and 3% of total federal revenues.

Whereas most people percieve this capital gains tax as being one of the greatest, if not THE greatest income stream for the government, it is acutally not even on the top ten list!

If you're asking yourself why it works out that way, consider that the main difference between capital gains tax and all other forms of federal tax is that it is basically a voluntary tax.

That's right, voluntary, at least as far as the IRS is concerned. People can avoid paying it by simply not selling their assets!

The fact is, inactivity of profit is now becoming increasingly common. Especially with the recent uncertainty in the stock market. The government estimates that there is $7.5 Trillion of unrealized capital gains which would all be subject to the tax if it were to be sold. (300 TIMES the amount collected in 1990!)

Antagonists of the Capital Gains tax have a more personal issue on their minds, however. They most often point to the inequality of how people must pay taxes on all of their gains, but are only able to deduct a portion of their losses.

This sounds bad enough on its' own, but it particularly hurts when applied to investments that fluctuate between gain and loss over time. One could find themselves with a net tax approximation of paying substantial taxes on an break-even investment!

But that's not the worst of it. In the U.S., capital gains are not indexed for inflation. This is a particularly nasty problem for Uncle Sam, which is ironic because the problem is unique to America.

In other countries, such as the United Kingdom, the capital gains tax rate is much higher, over 40%, but is actually indexed to inflation.

Furthermore, many U.S. states have their own capital gains tax! This can actually take the combined rate to almost 40%! California, Montana and Rhode Island are the three states with the highest rates... Serious stock investors, you have been warned!

So who does this poorly-written tax law hurt? Well, everyone. And it's certainly not benefitting the economy, either.