Interesting graph from the Wall Street Journal showing capital gains realizations with different tax levels. This obviously shows that lower tax rates leads to greater revenue for the government which is the point of taxing in the first place. This is the "long term" capital gains tax which applies to any realization on an asset over a one year period. Any gain realized in under a year is taxed at rate you pay on the rest of your income.
It is almost a certainty that tax rates will increase with the Bush tax cuts about to expire in 2010, and it's really a shame, but if we get a candidate who is willing to be prudent with government spending then the tax rates may not have to go up as much. Although the capital gains tax has an impact on economic growth, the tax that really could stimulate the economy is the corporate income tax. John McCain advocates lowering it from 35% to 25% but this could just be pre-electoral talk.
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"This obviously shows that lower tax rates leads to greater revenue for the government which is the point of taxing in the first place."
Clearly from that graph there is a correlation, but how did you come up with causation?
lower capital gains rate means more realized gains are taken, and after all, the gov't only gets its cut when gains are realized. think about it, if you could sell your asset now and pay 35% or wait another year and pay 15%, what would you do? I think I'd probably hedge my position and take the 15%...
by the way, i don't want to make this overtly political, but did anyone catch obama's response in the debate to Charlie Gibson's challenge that everytime we've raised the cap gains rate we've LOST revenue? Obama said it wasn't about revenue, it was about "fairness"... fair or not, that sounds like soft-socialism.
also, i dont believe most of the market problems are because of profit taking in advance of higher taxes, but is an interesting correlation between the probability of the democrats winning in 08 (as measured on inTrade) and the s&p500... check it out for yourself. When the democrats looked like a sure thing through February the market was off big. With McCain rallying and talking about cutting corporate taxes and keeping cap gains where they are, we're back up near DOW 13k. I'm not implying causation, you can decide for yourself, but those are the facts.
If you think about it, taxes in general change the behavior of individuals which creates distortions in the market. Like davksus alluded to above people act "irrationably" under the presence of taxes and generally you don't want to encourage distortionary behavior. There are cases where imposing a tax serves some other purpose than generating revenue (excise taxes) and that is perfectly fine, but I see no motive other than generating revenue for the capital gains tax. In fact if fairness is such an issue with the tax they should really lower the rate because that will encourage more people of all income levels to take advantage of investing opportunities. It's no secret that the most of the capital gains in this country come from the wealthly, but increasing the tax will just make it even less desirable.
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