Supporters of increased taxes on capital gains need to define the term. We only see sales of stocks and bonds. This is only one category. The maximum tax rate is 20 percent versus a maximum tax rate of 39.6 percent for ordinary or earned income. Assets must be held for a year to qualify.
Another one-year holding category is called collectibles and covers a whole bunch of things, including alcoholic beverages, with a maximum rate of 28 percent. If you realized a gain from small business stock held more than 5 years, you can exclude some or all of your gain under section 1202. Section 1250 applies to real property and provides for a substantial reduction from a maximum rate of 25 percent.
The justification for all these lower tax rates is that, when income is delayed, inflation will reduce its value. This same rationale exists throughout the tax code in various forms of depreciation and depletion allowances. This is the main reason why a 35 percent corporate tax rate becomes an average effective tax rate of about 19 percent.
However, when this policy was implemented in the 1980s, average annual inflation rate was about 8 percent and the code was built on this 8 percent assumption. Rates must be increased to reflect the lower inflation rate that exists today. We can easily provided free health insurance and college tuition for all Americans simply by taxing capital gains at or near the same rates as earned income.
Sam Wright, Olympia