Capital Gains Taxes: Defined And The Purpose To The FED

Capital gain is really defined as income or revenue that is acquired by the sale of an investment asset. This can be either a current asset or a fixed asset. The most common form of capital investment is real estate, stocks and bonds and a physical business operating as a going concern. The capital gain is seen if the asset is sold for more than the price paid for it, while a capital loss is the sale of an asset for less than the price paid for it. Most accountants and auditors believe that capital gains tax is synonymous to a tax penalty levied on United States productivity, financial and fixed assets investments and erodes capital accumulation. Capital gains taxes since its inception has been a federal tax and more of a nuisance in the filing of annual taxes than a necessity. Consistently revenue to the federal government of the USA has come from capital gains taxes. However this has only amounted to just fewer than 6% of total federal revenue. This means that the taxes are not as detrimental to the federal budget as was first anticipated. It is important to note that several programmes in the federal budget are below 6% and abolishing capital gains tax could have a serious impact on these programmes. That being said even if the capital tax was abolished the United States federal government would still collect at least ninety seven percent (97%) of its tax receipts per annum. While we still cite the importance of the capital gains tax receipts the tax rate which now stands at twenty eight percent (28%) for individuals and a corporate capital gains tax rate of thirty five percent (35%) is not only at its highest level ever it is burdensome on the disposal of assets. What is most notable is that the capital gains tax is cited as a voluntary tax (the only one in US federal taxation net). Based on the fact that capital gains tax is paid ONLY when a fixed and or current asset is liquidated individual taxpayers and corporate entities can avoid taxation payment by not liquidating assets. Most investors consider this as the lock in strategy or more commonly known as the lock in effect. When analyzing the curve of asset appreciation and federal revenue from capital gains taxes the difference is almost astounding. Not only does the former curve move much faster but the fact that lock in strategy is being employed severely limits the potential federal revenue that could be earned. Essentially what this means is that assets that appreciate in value over time are not being sold. Hence the assets continue to appreciate exponentially and with no gains for the federal tax receipts total. One of the most fundamental issues that capitalists have with the Capital gains tax is that it is indexed to inflation. This means that as inflation increases so does the value of some assets. This means that despite the real value inflation continues to push up the amount of capital taxes paid. In our next post we look at the intricacies involved with managing capital gains taxes and the bill passed by Congress to enact it.

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