Newt Gingrich promises to eliminate the capital gains tax so more money can flow into the market. This sounds like a good plan in theory, but after some careful thought it may not really be so great. On a personal level, most people probably hate taxes. Who enjoys letting the government get into our pockets and take away our money? It becomes even less enjoyable when the government takes more money from the poor than from the millionaires on Wall Street simply because the rich have investments.
It is a growing phenomenon that wealthy people, compared with the middle class, are paying a lower tax rate because their main sources of income are capital gains rather than salaries. Capital gains are the profits earned from investments, such as bonds, houses and stocks. The current maximum tax on capital gain is only 15 percent while the highest income tax rate can go all the way to 35 percent.
This leads to some awkward situations. Because the richest 20 percent of Americans account for 86 percent of the capital gains, they are imposed mostly by the 15 percent capital gains tax. Warren Buffet, for example, has an effective tax rate of 17.4 percent — mostly on dividends — whereas his secretary pays a higher income tax.
Something is wrong here, isn’t it? It is wrong because it violates fundamental logic. Does it make sense to anyone that the government should take more money from the poor than from the rich? By doing so, the government can only make the poor poorer and the rich richer, further splitting the gap of economic inequality. According to a 2011 Congressional Research report, the low capital gains tax has increased the income inequality in recent decades as dividends and capital gains become major sources of incomes for the wealthy Americans.
But that is not the only reason we should raise the capital gains tax even though it is part of playing a fair game. Think about it. The government collects taxes because it needs the money to improve our lives: road maintenance, dam construction, police’s salaries, etc. All of these acts need money. And as a part of this community everyone should also pitch in to help build a better America by not only paying taxes, but also producing goods and services. These goods and services will in turn benefit all other members of society. An investor, however, buys a stock one day, waits for a few days and then sells it at a higher price. What sort of goods and services does the investor produce? Barely anything. In a way, the Wall Street investors are like poker players who simply play the game of speculation, gaining a lot of money, but producing nothing to benefit the society. Since the Wall Street investors are nothing but poker players then doesn’t it sound like a fair game if the government raises the capital gains tax to make them contribute equally to the rest of the society?