Is Taxing Capital Gains Double Taxation?
Here's one argument against taxing millionaires and billionaires on their capital gains. This is a direct quote from Speaker of the House, John Boehner:
"Understand that those who pay a capital gains rate on their investments, they already paid taxes on this money originally at ordinary income tax rates. So let's understand that what we're talking about here is one of fairness and what helps our economy grow."
The basic argument seems to be, in other words, that taxing capital gains is unfair because it is double taxation. "This money," Boehner said, referring to the original investment money, was already taxed at ordinary rates; therefore, to tax "this money" again, referring to the capital gains, is unfair.
It's a very logical sounding argument. And, by appealing to our sense of fairness, it is made an emotional argument as well. (Boehner even throws in the obligatory fear element, implying that taxing capital gains will somehow inhibit the growth of our economy.) It is an argument that, if it were valid, should be convincing to any American who believes in the basic principles of fairness and justice.
And so, we come to the question: Is taxing capital gains, in fact, double taxation? And it seems to me that in order to answer that question, we really need to answer this question: Is original investment money the same money as capital gains money?
Now, to me, the answer to that question is pretty obvious. However, since this argument has been used over and over again to justify low taxes or no taxes on capital gains, and since so many Americans apparently buy into the argument, I think it's important to examine it a little more closely. And since I like examples (I think examples personalize, and therefore clarify, many arguments), I'll look at the question through a simple, fictitious example:
Ten years ago, after paying taxes on all of his earned income, Richie Deepockets had one million dollars sitting in the bank. He decided to turn this money over to a financial manager for investment. The financial manager handled the money well, and Richie received an annual gain of 10% on his investment, and therefore a check each year for $100,000. Richie's original one million dollars remained untouched, in the hands of the financial manager.
And so, we come back to the question: Is original investment money the same money as capital gains money? And the answer is clear - over a period of ten years, Richie Deepockets received one million dollars in capital gains while his original million remained untouched. Investment money and capital gains money obviously and clearly is NOT the same money. Therefore, the argument that taxing capital gains is unfair because it is double taxation is invalid and misleading.
In fact, if fairness is really the issue, then I think that capital gains should, at the very least, be taxed at the same rates as earned income. The other name for capital gains, after all, kind of tells the real story:
It is income that is UNEARNED.
Greg, January 2012