Impact of the Capital Gains Tax

Source: Kyle Pomerleau, "The High Burden of State and Federal Capital Gains Tax Rates," Tax Foundation, February 11, 2014.

There are many problems with the capital gains tax, says Kyle Pomerleau, an economist at the Tax Foundation.

First of all, it is a tax on income that was already taxed when it was earned originally.

• When an individual earns a wage, that wage is taxed by the state and federal governments. He then takes what is left and purchases stock. When he sells that stock and realizes a gain, that profit (the difference between the value of the stock at time of sale and time of original purchase) is again taxed.
• Most notably, the difference in stock value is often merely attributable to inflation, not an actual gain. As such, the effective capital gains tax rate is often much higher than what is stated on paper, as the individual may not even have profited from the sale.

Second, the tax encourages an individual to consume rather than to save. An individual who spends his money now on purchases will have to pay a one-time sales tax. However, one who saves his money and invests in stocks or bonds will not only be subject to the capital gains tax, but also to additional sales taxes once he uses the income generated to make purchases.

Because the tax encourages consumption, fewer funds are invested. And people who do invest are hesitant, due to the tax, to move from one investment to another, even if it would be better. All of this slows economic growth.

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Read more here.  http://www.ncpa.org/sub/dpd/index.php?Article_ID=24139&utm_source=newsletter&utm_medium=email&utm_campaign=DPD

The report is here.  http://taxfoundation.org/sites/taxfoundation.org/files/docs/FF414.pdf