Xin,

You are completely off base on this one. For low to middle income workers, savings and investments are generally invested in tax sheltered accounts (401k, IRA, etc). There are no capital gains until you start to remove the money in retirement. When you start removing funds in retirement, they are taxed as income anyway.

I don't know many people in the sub-$150k range who can put away $19,000 a year ($15,000 in 401k, & 4000 in IRA). I know that some people don't have a 401k, but let's face it, most Americans can get out of credit card debt, let alone put away $4000 in an IRA.

Personally, I don't really care about the politics, but your blog entry was factually incorrect.

Two major inaccuracies in this post:

1. Obama proposes capping the maximum capital gains rate at 25%, not 28%. (Even 28% wasn't really a "doubling" as the post states.)

2. More importantly, he only proposes raising the capital gains rate on taxpayers in the highest tax bracket. For everyone else, the rate remains the same.

See pp. 8-9 in the report your post links to.

Johnny,

Agreed that there are those out there who do max out everything (I'm actually one as well). However, when setting public policy, you have to look at what benefits the majority, while respecting the differing opinions in the minority. If the extra funds are used to say, oh I don't know, maybe add a personal finance class or two for high schoolers, than it benefits everyone, including other investors.

@ Johnny:

I would seriously have to re-examine your thinking on your post.

Why are you voting for this individual if you don't want to pay the higher taxes? If you're voting for someone because he's the "flavor of the month" or because "you want to be a part of history", then you're voting for the wrong reasons.

Voting is about casting your voice onto the person who best represents your values and beliefs, regardless of what the "popular" thing to do is. I mean, this isn't high school. You're not a lemming, following what everyone else is doing so that you can be accepted as "normal". Even trendsetters have to get inspiration from somewhere.

I am also one of those people Xin refers to -- moderate income with investments in non-tax-advantaged accounts (though I do have IRAs, etc.) so I am concerned about capital gains taxes. These taxes have been reduced lately but are set to revert to previous levels (see my post on Certainties: Death, Taxes, and Change).

It looks to me that Xin was not saying that 401ks would receive capital gains tax treatment but rather that retirees would need to supplement their income with investments, and thus would incur higher taxes on these "extra" investments at a time in their lives when no more income will be coming in---ever.

However, it is a good point to consider when planning that many retirement assets will be taxed at ordinary tax rates; though the Roth is not to be taxed at all. I know many don't think that the Roth provision will last, but here's hoping that it will.

My understanding is that business capital gains are taxed at ordinary tax rates; whereas housing gains are virtually tax-free (up to a certain amount). I would love to see securities' gains taxed the same way that housing gains are, or at least to see that saving/investing is a good way to build wealth as housing investment.

Look, most of the public is ignorant when it comes to economics. Plain truth is that people have better things to do - like survive.

Our economy today is a socialist/fascist mix. Before you get your panties in a knot, I'll explain.

Communism - means of production & distribution OWNED by the state.
Socialism - means of production owned by the state.
Fascism - means of production & distribution heavily regulated by
the state.

The entire tax situation is Kafka-esk (absurd) and every time it's tweaked, complexity is added. The U.S. founders were brilliant men but the constitution they crafted contained a fatal flaw. The document did not link liberty with responsibility. They made an attempt - only wealthy landowners had a vote (in the beginning). These were the movers, the shakers, the doers. But this changed quickly.

They assumed everyone had a sense of responsibility and, in their time, they were right. In today's world, there's is precious little individual responsibility. As a result, everyone expects to be taken care of and failure impossible.

The age of Big Nanny Government is here. Folks, you don't have to look too far out to see the system is going to fail.

I wonder what would happen if we eliminated the capital gains tax completely? How would that affect the amount of capital available in our markets? How would that fuel further entrepreneurial ventures and growth? Could the growth attributed to tax-free capital gains then be used to further aid society? Instead of depending on government programs to attempt to aid the same society?

The biggest flaw I see in the capital gains tax as it stands now is that it doesn't take inflation into account at all. Inflation is built into every every asset's future price, and the fact that it's completely ignored when calculating the base is beyond me.

i agree with the plan. If your earning dollars - from money sitting in the bank, you should be taxed on that just as much as income you go out and work for. I make under 35K a year and paid 20% of that out to taxes last year - i don't think there should be an exception to people making money off interest.

There is no "double taxation" of capital gains. Your facts are not correct. If you believe there is, then you do not have a grasp of the current income tax system. Here are some basics:

Broadly speaking, an individuals monetary gains are taxed as "ordinary income" or as "capital gains". Ordinary income includes wages, and also interest. Ordinary income is taxed at progressive rates depending on how much income one makes in a year. Ordinary income is calculated by starting with the amount of income received, and subtracting out any deductions. Most wage-earners don't have any deductions, and a large number of Americans, ordinary income is typically the amount they earn from work. So if Joe earns $150 from work, Joe pays ordinary income tax on $150 (plus social security / medicare taxes, but those taxes aren't relevant to your post as they very rarely apply to dispositions of capital assets).

Capital gains are profits from the sale of an asset, including intangibles such as stocks or bonds, and also tangibles such as real property. Capital gains are calculated by beginning with the amount received on sale of the item, and subtracting out the amount of post-tax dollars that were paid for the item. This means that if you buy a stock for $100 that you later sell for $150, your capital gain is $50 and you are taxed on that $50. You do not pay tax on what is effectively the return of the $100 you spent in the first place. The reason that you do not pay tax on that $100 is because you paid tax on that in the first place when you earned the money, either through a preceding capital gain, wages, etc.

The system outlines above is repleat with exceptions and special rules. Notably for most individuals, gains from the sale of your principal residence are tax free up to $250,000 (single) / $500,000 (married filing jointly), if the residence has been owned and occupied by you for 2 of the last 5 years. As far as I am aware, no mainstream politician has proposed repealing this very generous exception to the capital gains tax.

Assuming that your policy objections are genuine, consider the lack of parity in the taxation of income from wages versus investments: Why are wage earners "slapped in the face" by being compelled to pay income + other payroll taxes on their wages, while millionaires pay a far lesser % of their income in total tax?

If you're being taxed on cap gains, you should be glad to have the gains in the first place! Plenty of investments lose money, and you're allowed to deduct them from taxes. The government feels your pain. Taxing gains and writing off losses even out the risk of owning capital.

If you want lower, or less cap gains tax, I suggest we also get rid of or reduce deductions for losses. That will be more dynamic and exciting for everyone, including "non-investors".

"I have no idea why Senator Obama thinks this tax increase is fair in any way to all the individual investors like you and me who are by no means super rich."

Really? Don't you think it has something to do with the fact that for those of us with household incomes under $100,000, 1.4% of income on average comes from capital gains and dividends-- while for those with household incomes over $1 million, 31.4% of income comes from capital gains and dividends? (Source: http://www.cbpp.org/1-30-06tax2.htm) And so those households earning millions every year are paying only 15% on a whole third of their income, while the rest of us are paying 25% or 28% on most of ours?

Honestly, I personally would be perfectly fine with people from my or any other tax bracket paying higher capital gains taxes-- yes, it's good and responsible to save and invest, but why should that new income get taxed at a level lower than any other new income? Most of us are paying 25% or 28% on our income from work (more, when you count FICA), 25% or 28% on our interest income from savings accounts... it seems kind of overdramatic to get offended about having to pay that much on investment income too. (Why's it so special?) But that's not even what Obama's talking about anyway! He's talking about raising it some (maybe not even 28%, he just said no more than that) for the very highest-income people-- people making more than $250,000 a year. (http://mediamatters.org/items/200806120006)

"Suppose a retiree saved up a nest egg of $150,000 of which $100,000 is long term capital gains, then this particular retiree will lose $13000 if the capital gains taxes were raised from 15% to 28%."

Um, I suppose so, if they sold it all in a single year, and had lots of other income, and thus made it up into a high enough bracket that year. It seems a lot more likely that people with modest nest eggs would have lower capital gains in any given year and end up in a lower tax bracket where they wouldn't have to worry about the increases...

It seems pretty clear to me that the proposal is about addressing the fact that the highest income people get a disproportionate amount of income from capital gains and dividends, and that they pay a ridiculously low tax rate of 15% on that right now compared to what the rest of us are paying on most of our income. Even without Obama's stated commitment to raising capital gains taxes only on the rich, only a small fraction of upper-middle class folks (let alone average Americans) are paying capital gains taxes and on only a small fraction of their income.

"The taxes on $100k of gains would be $28k as long as the retiree falls within the 28% capital gains bracket. It's simple math really. Additionally I'd like to make it clear that you don't need a lot of income to fall into the highest capital gains tax bracket. In fact, your top income tax bracket only has to be 25%."

I think you're getting things confused. Currently, today, if you're in the 25% income tax bracket or above then you pay the highest capital gains tax, 15% (or to say it a different way, people in the top four income tax brackets all pay the same capital gains tax of 15%.) But what on earth does that have to do with who would pay 28% under proposed tax changes?

The only reason to expect that Obama would raise the capital gains tax rate on people earning $32000 a year is if you're flat-out calling him a liar-- he's clearly said he wants it to apply to just the wealthiest people and not the middle class.

Obama know's that in this country you really have to be careful when messing around with the income of folks in the 150,000 to 300,000 bracket. Lot's of these people are true believers in the "meritocracy," and they actually think they are part of the middle class (even though they make up a tiny percentage of total households in the U.S.), and scream bloody murder if you go after their income. Why do you think his proposed Social Security payroll tax increase only kicks in above 250,000? This leaves a nice donut hole in the 100,000 to 250,000 range where peaple can max out their S contributions and get a pay bump heading towards Christmas. My wife is a doctor and we always get a 600$ bump or so a month starting about September thanks to the current contribution cap.

I think he's gambling that the majority of people in this pay range also won't scream about the (in my opinion) much needed capital gains increase, which will affect this income group far less.

Republicans are more business friendly when it comes to taxation policies, however the Republicans squandered public trust in their party with eight incompetant years. Obama will talk about doubling capital gains, but won't get that far. He'll probably raise it slightly, but small business owners and large corporate executives will fight him tooth and nail and keep the increase small.

The populist rhetoric is dangerous, people like the idea of depending on government, but governments are incompetant. Giving my money to the government to help the poor or the elderly sounds great, except that people working for the government can't work anywhere else. That sort of stupidity keeps me from being liberal in my economic views. Increasing taxes won't help the public, it'll only help the government.

Now I don't live in the states so i don't really give a crap about the taxation policy but as long as the upfront tax cut you're getting is more than the increase in capital gains tax you're in the money

This is in essence the crux of the problem but it gets a bit complicated since the tax cuts work on all your income, not just the portion that you would invest. The fact that income isn't taxed at a flat % means that a change in marginal tax rates will change the average tax rate paid differently per person depending on their income as this is the weighted average of each marginal tax rate.

Not only that but one must take into account the portion of income an individual puts into savings and that which is used for consumption.

Thus the net benefit from this policy would be the present value of the capital gains lost (actually the formula can be truncated to increase in cap gains tax * amount invested in a relevant instrument) versus the upfront benefit of lower taxes paid in an optimal allocation of income.

One can see now why this is nearly impossible to solve as the optimal allocation is unique to each individual.

It can be generalized however that the more one saves, the more hurt you are by this policy ignoring contributions to 401ks and IRAs which are taxed as income at retirement.

To summarize all of my ranting, if the new tax policy saves you 2% in average tax payable a year your break even point assuming an increase in capital gains tax of 15% would be investing 2/15 of your after tax income in capital assets which are affected by this policy, invest more you are hurt, invest less you are better off.

This is an extreme generalization as it does not take into account the benefits you gain from reallocating your consumption/savings and the type of savings which you can use (tax free investments, bonds which pay interest as opposed to cap gain unless of course you sell them before maturity, etc.)

I'm going to go out on a limb here however and say that this policy is good just because most Americans don't save nearly enough for this policy to hurt them, and not all savings are capital in nature. One also must take into account that the laws affecting capital gains tax may change in the future but the tax savings from lower marginal tax rates are immediate and irreversible.

So to sum up ... again ... the answer to this question is .... wait for it ... MAYBE ...

wow what a political answer, maybe i should run for president

The notion that people are only paying 15% on their dividents is false. I pay 15 % on my company profit up to 50,000, then another 15% divident tax again. Most companies are paying 35% , the you pay the 15 %. America is tax hell so don't be surprised why businesses have been dismantling and others just not locating here. There are plenty of freer countries around the world. As far as Obama paying for roads and bridges, that just makes driving appear cheaper than it is, wastes fuel and promotes urban sprawl. Taxes should be paid by the users. If he said he will put a $5/gal tax and at the same time repeal all income, capital gains and divident taxes I would be all for it. It would eliminate enormous amount of coruption, favoritism and compliance costs. At the same time there will be millions of people finding ways to conserve fuel, the investment in other energy would explode free of taxes and complicated credits schemes.