From the Wall Street Journal – A Capital Gains Primer.
Far from being a loophole, the low tax rate applied to capital gains is beneficial and fair for several reasons. First, under current tax rules, all gains from investments are fully taxed, but all losses are not fully deductible. This asymmetry is a disincentive to take risks. A lower tax rate helps to compensate for not being able to write-off capital losses.
Second, capital gains aren’t adjusted for inflation, so the gains from a dollar invested in an enterprise over a long period of time are partly real and partly inflationary. It’s therefore possible for investors to pay a tax on “gains” that are illusory, which is another reason for the lower tax rate.
Third, since the U.S. also taxes businesses on profits when they are earned, the tax on the sale of a stock or a business is a double tax on the income of that business. When you buy a stock, its valuation is the discounted present value of the earnings.
The main reason to tax capital investment at low rates is to encourage saving and investment. If someone buys a car or a yacht or a vacation, they don’t pay extra federal income tax. But if they save those dollars and invest them in the family business or in stock, wham, they are smacked with another round of tax.
Moving rates higher has damaging effects. Economist Allen Sinai estimates in a report for the American Council for Capital Formation that raising the capital gains rate to between 20% and 28% would reduce U.S. employment by between 231,000 and 602,000 jobs a year, and that with slower growth and a weaker stock market “the federal budget deficit actually ends up larger.”
Even on class-warfare grounds, it is counterproductive to raise taxes on capital. Most of the returns on investment in a business benefit workers (not shareholders), because they become more productive with more modern factories, computers and equipment made possible with investment capital.
Obama’s proposal is so destructive that it alone should cost him the election in a landslide, yet the pundits, their lemmings in the social media, and other economic morons continue to salivate on the trivial, the gotchas and irrelevant noise. His fiscal policies are enormously destructive and we would be in even worse shape if he had gotten his other proposals like the the card check bill and cap and trade through. It is almost October and business investors have no idea what their taxes will be in January. They are sitting on trillions of dollars in investment capital and it is leaving the country for better opportunities. If Obama wins this capital will continue to sit idle or leave.