Hillary Clinton last week proposed raising the capital gains tax on long-term investments, and this got me thinking about taxes in general and income taxes in particular. Now I don't make myself out as a tax expert -- why, I've only read 30 - 40 pages of the tax code which by some measures is 70,000 pages long, by others "only" 2,600 pages long -- but I do have some background in business and economics. Don't take my views on taxes as any definitive analysis, just one retiree's semi-informed opinion.
Clinton suggested applying a sliding scale to investment profits, based on how long people have held the assets. Currently, capital gains are taxed at personal income tax rates if the assets are held less than a year. Assets held more than a year are taxed at a preferential capital gains rate. The idea is to reward true investing, but discourage short-term trading.
Also, as many retirees are well aware, dividends are taxed at a preferential rate, although income from bonds is not. Clinton's plan would increase the maximum rate on capital gains made on assets held between one and three years, currently 20 percent, to at least 28 percent.
What would be the effect of this increase? Clinton did not say how much revenue would be raised; she said she'd offer more details at a later time. But clearly, it would increase taxes for people who own stocks and mutual funds. Wealthy people. Retired people. People saving for college or any other reason.
It would not affect real estate, nor would it affect tax-advantaged retirement accounts. But in any case, it seems like the Clinton proposal is a trial balloon that is going nowhere fast. Even the liberal Huffington Post cast a dim eye on the plan, quoting Bob McIntyre, director of the progressive Citizens for Tax Justice, who said most wealthy investors avoid capital gains taxes by finding ways to defer asset sales but small investors in mutual funds would be penalized by Clinton's plan.
A more sensible approach might be to tax investments on a sliding scale based not on how long they are held, but on how much income a person makes. In other words, to tax investments like earned income -- a lower rate for lower income people, a higher rate for higher income people. But nobody that I know is suggesting such a thing.
Also, nobody is talking about raising the tax on co-called "carried interest." This is a fairly obscure, but very profitable tax dodge that allows partners in private equity firms to count a significant portion of their income as capital gains or qualified dividends rather than regular income. So instead of paying the top rate of 39.6 percent, plus the 3.8 percent Medicare surcharge on income over $200,000 (and you can bet these hedge fund managers make more than $200,000), they only pay the capital gains rate of 20 percent.
Why is nobody -- not Democrat or Republican -- talking about abandoning carried interest? I do not know. But do you think, just possibly, that campaign contributions might have something to do with it?
And while we're on the subject -- a subject near and dear to every retiree's heart -- why is there so little talk about "saving" Social Security by getting rid of the salary cap on the payroll tax? Everyone who works pays 6.2 percent Social Security tax, plus 1.45 percent Medicare tax, on the first $118,000 of earned income. Employers pay the same amount for each employee, again up to the limit of $118,000 per year. After that, people don't pay any more Social Security tax. How fair is that? The more money a person makes, after $118,000 per year, the lower their tax rate.
Finally, I saw that Bernie Sanders also has a tax proposal. I'm no fan of Bernie Sanders -- he wants to take money away not just from rich people but from middle-class people like me, and give it to other people he likes better; plus, he's against gun control, and I'm in favor of gun control -- but this particular tax plan, which he calls a Robin Hood tax, may have some merit. He wants to place a 50 cents tax on every $100 of stock trades, plus lesser amounts on bonds and other financial instruments.
The question I have is, does he mean 50 cents for every $100, which basically is an additional half percent
tax on all our investments? That seems a bit steep to me, adding to the punishment that savers already suffer. Or does he mean a 50 cents tax on every trade worth over $100? That seems more reasonable: He wants to skim a little off the top from major investors and give it to a worthy cause.
He says the tax could slow down automated high-frequency trading, which might be a good thing. And he wants to use the money to give everyone a free college education. He doesn't say whether his Robin Hood tax would actually raise enough money to support college education for everyone; but that's a whole other issue ... how much college really costs and what the effects of free tuition would be.
Well, there's plenty more on taxes, but that's enough for now. You can't bite off all 2,600 pages, or 70,000 pages, all in one gulp.