Fuel for Tax Rate Increases - The Capital Gain Tax Debate

With the recent release of some IRS statistics that the 400 highest-earning U.S. households reported an average of $345 million in income in 2007, up 31 percent from a year earlier and  the average tax rate for these households fell to the lowest in almost 20 years you can imagine the political hay that may be made.

Each household in the top 400 of earners paid an average tax rate of 16.6 percent, the lowest since the agency began tracking the data in 1992, the Internal Revenue Service statistics show. Their average effective tax rate was about half the 29.4 percent in 1993.

Here is but one example of the rhetoric already hitting. A quote posted at Bloomberg.com attributed to Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities has him saying, "two long-term trends: that income at the very top has exploded and their taxes have been cut dramatically." It is no secret that this research group openly supports increasing tax rates so a statistic such as this is made to order for their agenda.

How could these wealthy folks get such a great low tax rate? Primarily because a substantial portion of their income likely comes from dividends and capital gains which enjoy lower tax rates. Not to mention the also are the ones investing in depreciable assets that help fuel the economy and they get deductions over time against their ordinary income for these items.

Also important to note is that these statistics reflect the results of 2007 income tax returns, the most recent available and a different economic climate than exists today.

How important is this statistic and should all of us not lucky enough to reside in one of those top 400 households be up in arms over the apparently low tax rate they pay? Hardly.

For brevity, let me point out that study after study over the decades have been clear that favorable tax rates for capital gains actually helps the economy and increases tax revenue. There are many reasons for this, chief among them are that investors are more willing to sell successful investments and pay the tax and go into other new opportunities. I know, many of you will disagree and that is fine. But if we can simply keep the capital gains tax rate focused on what really happens in the economic studies and economy as capital gains tax rates are raised and lowered I suspect we would wind up agreeing... that raising capital gains tax rates is a very bad idea.

Take a look at some of these links for discussions about capital gains taxes and the economy.

Do you think all this will create plenty of heated debate in DC? You bet.

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