NCPA - National Center for Policy Analysis

Double Taxation of Capital Gains Must End

January 25, 2013

Wealthier taxpayers, those individuals making more than $400,000, have long paid taxes on their income twice through the capital gains and dividends tax. The double taxation of investment income slows economic growth and the rise of living standards, says Sheldon Richman, a senior fellow at the Future of Freedom Foundation.

  • The fiscal cliff deal will trigger the capital gains tax to rise to 20 percent, 5 percent higher than under the Bush years.
  • The capital gains tax taxes a person twice, once when he or she earns his wages or salaries, the top rate of which is 39.6 percent, and again after income from the investment is realized.

Richman draws an example that if you're paid $1,000 for work, the complete absence of an income tax would leave you the option of spending that $1,000 or investing it at 10 percent interest to yield $1,100 one year from now. With a flat 10 percent income tax, you receive only $900 dollars from wages after taxes, a $100 decrease, which means that if you invest your $900, you will only receive $90 back a year later. With a 10 percent capital gains tax, the $90 in investment income is taxed, subtracting $9, and leaving you with a real gain of only $81.

  • Corporate taxes can add a third layer of taxation, which amounts to an additional federal tax of 35 percent.
  • Richman says that all income should only be taxed once and that double and triple taxation is out of line.
  • Single taxation would encourage savings and investment, which are necessary to supply capital to investors.

While Keynsian economic theory suggests that savings removes potential consumption from the economy, deferred consumption is healthy for our modern economy with its multistage capital structure.

The government should not penalize investment or set policies that reward an individual with taxes based upon the manner in which he or she chooses to allocate his or her personal income. In a free society, a person should not suffer for his choice to save rather than spend. Milton Friedman agreed with this sentiment, stating that the government has no business trying to set the savings rate.

Ending the investment tax is a tough political pill to swallow. Politicians, loathe to decrease government revenues, are unlikely to argue for the elimination of the capital gains tax. However, eliminating it would smooth over an injustice in the tax system and bolster economic growth.

Source: Sheldon Richman, "Why Double Taxation Must Cease," Reason Magazine, January 6, 2013.


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