What if long term capital gains were taxed as ordinary income? - Bargaineering

What if long term capital gains were taxed as ordinary income?

Posted: 28 Dec 2010 04:47 AM PST

Stock Market The Bush tax cuts were a hot topic these last few weeks between the deal making (extending cuts for all in return and estate tax relief for extended unemployment benefits) and the political dancing, but ultimately something had to be done. While much has been made of the tax brackets themselves, one of the other things that went along with it was the long term capital gains tax rate. They were set to increase from 0% and 15% to 10% and 20%, respectively.

So here’s the question at hand, what if we no longer had favorable long term capital gains rates (and dividend tax rates) and instead all investment gains were taxed as ordinary income? In other words, what if there was no such thing as long term capital gains? What if everything were taxed as short term?

Less Stock Market Investing

Investors have a lot of options when it comes to where they want to put their money. Many of them put it in the stock market because long term capital gains are lower than their marginal tax rate. While it’s hard to say how many people invest because long term capital gains rates are much lower, we can probably all agree that the number is greater than zero. That means if that incentive were removed, some people who consider other options.

Dividend stocks would be less appealing: One reason why they look to dividends is because it’s taxed so little relative to ordinary income. When you tax it at the same rate as other income, the big incentive is gone and they might consider something else. Here’s what you look for in a dividend stock – stability, yield, and yield growth (obviously a simplification). Many dividend investors purchase these stocks because they want the cash flow. They see the dividend as a stream of passive income that will grow over time.

Why Other Investments?

Another reasons investors will shift their money into other investments is because of how gains are reported. When you sell a stock or receive a dividend, you usually do it through a broker and that broker will send you a tax form detailing your activity for the year along with your gains and losses. You must declare that on your tax return because the IRS already knows about it.

Now consider a rental property where you rent it out to a family. They pay you rent each month and you deposit it into your bank account. At the end of the year, no one sends the IRS anything. If you didn’t claim it on your return, it’s near impossible for the government to catch you. (this is an imperfect example because rents are already taxed as ordinary income but it’s an example everyone can understand easily) There are plenty of similar examples, where you can sell an asset at a higher price than what you paid for it, where the difference isn’t reported.

Who Does This Hurt?

I don’t think it hurts people in the higher income tax brackets because they will have plenty of investment options. I think it hurts the lower brackets, people who have their retirements invested in index funds or retirees invested in dividend stocks. Fewer people entering the stock market, because it’s less attractive, means some component of its growth will slow, which hurts people whose futures are directly tied to the market (retirement savings).

I think there are plenty of other places to set your revenue boosting sights before capital gains (that said, I think increasing them to 20% or some smaller amount can help boost revenue while mitigating the effects of a higher capital gains rate). If you want people to invest, you have to make it attractive.

What do you think?

(Photo: thewalkingirony)

What if long term capital gains were taxed as ordinary income? from personal finance blog Bargaineering.com.

American Express Eliminating Some Foreign Transaction Fees

Posted: 28 Dec 2010 04:21 AM PST

American Express announced this month that they would be eliminating foreign transaction fees for Platinum and Centurion cards starting at the end of the first quarter of 2011. Foreign transaction fees are fees tacked onto purchases made in another currency and one of the big reasons why we opened up a Capital One credit card prior to our trip to Europe last year.

As an added bonus, if you’re a Platinum or Centurion cardmember, you get $200 in airline fee credits that can go towards airline fees from food to changing a flight to airport lounge day passes to checking a bag.

According to an updated list of foreign transaction fees at CreditCards.com, Capital One is still your best bet for avoiding a foreign transaction fee (unless you have a Platinum or Centurion American Express card).

American Express Eliminating Some Foreign Transaction Fees from personal finance blog Bargaineering.com.