Plus so many ways to defer capital gains taxes, while not many ways to defer taxes on my W-2 income?
Is this all a way to favor capital over labor structurally? This is not even a republican Vs democrat (or Maga vs liberals)issue at this point.
Can anyone explain me why capital gains tax is only about 20% while W2 wages are taxed at a top rate of almost 40%?
byu/Jealous-Yoghurt-2099 ineconomy
Posted by Jealous-Yoghurt-2099
22 Comments
I would bet it is to encourage investing.
To make the rich get richer. Our system is based on the income tax, not a tax on wealth.
Rich people make the laws. This is no mystery. And once you have enough money, you don’t need to pay any taxes at all.
Congress decided to favor investing and risktaking, rather than ordinary income for economic growth
Cause working is for suckers?
Because for the vast majority of people investment capital comes from post-tax labour income. Taxing capital gains at the rate of regular income also incentivizes far more risk-taking, as expected return is a function of risk and tax considerations are part of that (that’s also the reason why higher corporate tax rates encourage higher corporate indebtedness, since interest is tax deductible but equity is not).
Because rich people shouldn’t have to pay taxes.
The wealthy accumulate or inherit assets tax free, and then borrow against the assets as they grow in value, and then pass the assets along at their stepped-up values, tax free, to the next generation. And so on.
The working stiff pays federal, state, and city income tax, plus SS tax and Medicare/Medicaid tax on their income.
The scales are hard tilted to the rich. Next question?
Because the people making the rules pay only capital gains tax if they pay any at all.
The people who hold capital have enough money to buy laws.
It encourages saving and investing
The logic is that money invested has already been taxed once. At least that’s what rich people that invest tell us.
Rich people don’t have W-2 jobs.
Crickets from conservatives?
> Is this all a way to favor capital over labor structurally?
Yes.
In a finite game, you can’t have winners without losers. Making sure the people who actually make the world are constantly struggling (while teasing them with future rewards) keeps the world being made. Making sure capitol isn’t taxed heavily makes sure the people who have always had money keep their money.
The winners need more losers so they keep making sure we keep losing and never work together to make a more interesting, less finite game.
Because the money invested is oftentimes already taxed.
One answer is “to encourage long term investment” – short term gains (<1 year) are taxed as normal income.
A secondary reason (or at least justification) is that it helps account for inflation. It’s not perfect, but it simplifies the processes of setting the rate. (I.e. no need to adjust the cost basis to inflation before determining real gains.)
The way the tax code around these is written has a lot of benefits to middle/upper middle class (people in a position to start acquiring assets) so are beneficial to 50+% of people at some point in their life (definitely more likely later and less noticeable when young). Also more likely in high cost of living regions that have similarly high incomes to support the costs (think real estate/primary home sales rather than stocks, though in many places the $250k deduction against profits on sale of primary home will be more beneficial than the lower capital gains rate – often completely eliminating tax from the sale profits).
SHORT TERM capital gains IS 40%, only long term gains (held for a year or more) is only 20%. (This is to discourage speculation, which tends to over-rely on shorter term plays.)
If you make less than $500k/yr, your effective income tax rate is [less than 17%](https://www.pewresearch.org/short-reads/2023/04/18/who-pays-and-doesnt-pay-federal-income-taxes-in-the-us/). So you’re premise is reversed. Capital gains is a higher rate than income tax for most people. But because of high marginal tax rates (higher tax brackets for high income), only people who make more than $500k pay a higher effective income tax rate than capital gains.
If you think anyone is taxed at 40%, then you don’t understand how tax brackets work.
I believe the logic has something to do with it being considered ‘double taxation’ by some (e.g. a corporation pays income tax and then shareholder pays interest income and capital gains tax on stock dividends & appreciation).
However I don’t agree with this as they are fundamentally different kinds of taxes.
Taxes disincentive behavior. So taxes on wages discourage people from working. However, people are not very sensitive to income taxes on wages. The empirical literature suggests that it takes a very large income taxes rate before people significantly reduce their labor supply. The literature also shows that people are much more sensitive to taxes relating to investment; it doesn’t take a large capital gains tax to significantly discourage investment (relative to wage income taxes). This also limits how much revenue can be generated through taxing capital gains instead of wages.
Because rich people largely write the law.
Rich people are the majority of people who pay capital gains.
Thus they wrote the law to benefit themselves.
Basic human nature.