It's Time To Eliminate "Capital Gains" Tax

(The image above is by the inimitable DonkeyHotey.)

Did you ever wonder how it is that Mitt Romney could pay only a 13% tax when he made over $20 million in income? The reason is something called a "capital gains" tax. If Romney had worked for his income, it would have been classified as earned income and he would have had to pay about 36% minus his personal deductions (which was the top tax rate at the time). But since it was investment income (classified as a capital gain), he only owed a 15% tax rate (which was lowered to 13% due to personal deductions).

This is one of the most unfair parts of our tax system -- that the rich get to pay a much smaller tax rate of their income (which is mostly capital gains, or investment income) than the middle class (who actually have to work for their income). It hasn't always been like that, and conservatives haven't always touted the value of a special capital gains tax rate. In fact, conservative icon Ronald Reagan didn't support giving the rich a special and lower tax rate than ordinary Americans. He thought the rich should pay more because they made so much more.

It was only after George Bush became president that the special capital gains tax came into being. Bush fell for the ridiculous Wall Street argument that a lower capital gains tax would spur investment and create jobs, so he lowered the capital gains tax to only 15% (less than half of what that income was being taxed at). Of course it didn't spur investment or create new jobs. The money just went into the bank accounts of the very rich, while the Bush administration presided over one of the worst periods of job creation in our history.

When President Obama raised the top tax rate from about 36% to nearly 39%, he also raised the capital gains tax rate for the very rich from 15% to 20%. That is still only about half of what they should be paying (if their income was taxed as earned income, like it has been in the past, and like the bottom 90% of all Americans have to pay). What should have been done is to eliminate the capital gains tax altogether, and return to taxing all income at the earned income rate.

The Republicans (creators and protectors of the special capital gains tax rate) have been whining that our deficit (and national debt) is too large. But one of the most significant things that could be done to lower the budget deficit (outside of cutting the bloated military budget) would be to raise the capital gains tax rate to equal the earned income rate. This special tax rate for the rich is going to cost our government about $161 billion in revenue this year (and could pour nearly $2 trillion into the government coffers over the next 10 years). That's not pocket change.

This special tax rate for the rich is both unfair to other Americans (who work for their money and pay a higher rate) and is costing the government hundreds of billions in revenue every year. It should never have been created, and it needs to be done away with as quickly as possible. There is simply no legitimate reason for the rich to be taxed at a lower rate than hard-working middle class Americans.