Capital Gains Taxes

Is the capital gains tax rate too low? Not if you look at the whole picture. Pretend you risk your money by investing in a new company. With your money, the business manages to make $100 profit (after expenses, employee's wages, etc.).

"Yay!" you think. You didn't lose your investment. You made money instead. But you forgot one important thing – the corporate tax rate. That business has to pay approximately 40% of its earnings in taxes (state and federal) before it can give any money to you.

So this new business that you supported sends $40 to the government. “Oh, well,” you think, “I still get $60.” Not quite. Once the company sends the $60 to you, you have to pay taxes on it again. Granted it’s only 15% since it’s capital gains. But 15% of your $60 is still $9.

You send the $9 to the government. You figure it’s a rough deal, but at least you got to keep $51 of the $100 that the business made with your money. But then your neighbor complains that you didn’t pay enough taxes – he has to pay 35% income tax.

Ugh! Forty-nine percent of your profit went to the government, and someone is complaining. Well, that’s his problem. You have a different problem. You’re staring at that $51 in your hand and wondering if it’s worth investing it again. Investments are a little risky. Maybe you should hide it under your mattress.