In recent weeks he has proposed subsidized broadband Internet access for everyone, at least seven days of paid sick leave for all workers, and free community college for all students. Now, the nation’s chief executive is proposing to raise the capital gains tax to 28 percent to increase the tax burden on the wealthy and decrease the tax burden on the middle class. All of these proposals will be detailed in his annual State of the Union address, which occurs every January.
Raising the capital gains tax is a justified move that actually has a chance of providing real economic relief for the working- and middle-classes.
The capital gains tax is the tax on increases in wealth from real estate, household furnishings, and investments like stocks and bonds, explains the IRS. This tax is considerably lower than the tax on income. While normal income can be taxed up to 39.6 percent, investment profit can only be taxed up to 20 percent. Until 2014 (tax year 2013), the capital gains tax was only 15 percent. This meant that individuals who made most of their annual income from investment profits, ranging from real estate to stocks, paid a lower tax rate than individuals who made most of their annual income from their paychecks.
Though a lower capital gains tax is intended to encourage all Americans to invest, this tax has the detrimental side effect of allowing the wealthy, who tend to be able to invest far more than their middle class peers, to pay lower tax rates. A wealthy person can put his or her millions in the stock market, make millions in profit annually, and only pay 20 percent in taxes. A middle class person can work like a dog for 60 hours a week and pay over 25 percent in taxes.
Working- and middle-class individuals often cannot take advantage of the low capital gains tax because they cannot afford to invest. The money they would use to purchase stocks, bonds, and real estate simply does not exist after all the bills are paid. As a middle class worker myself, I am lucky if I have enough left over to contribute to my IRA every year! The continued erosion of real wages for all but the top one percent has certainly affected my bottom line.
While many will undoubtedly decry Obama’s call to raise the capital gains tax rate, their cries are hollow. It is not as if the wealthy will stop investing, or even slow their pace. Raising the capital gains tax from 20 to 28 percent still leaves investing a far better deal than working a day job. Wealthy investors are still making tons of money for doing…well…relatively little, compared to their middle class brethren. The stock market can make you rich even as you stream Netflix or play X-Box.
How many millionaires and billionaires will pull their money out of the market and keep it cash, or in a savings account, out of spite? Zero. How many will yell “That’s it! I’m out of the investing game! I’m going to work a day job!” Zero.
Instead, the government can now afford to lower the tax rates on lower levels of income. The middle class can enjoy a lower tax burden and have more money with which to pay bills and — gasp! — invest. The increase in middle class spending will further stimulate the U.S. economy and improve the jobs situation.
Obama, I support your proposal to increase the capital gains tax.
