In last night’s debate I heard Mitt Romney mention that one of the drivers for eliminating the capital gains tax is retirees on a fixed income. Both candidates are so far removed from the average American experience that neither one has addressed the obvious flaw in this logic. Capital gains is only a factor if retirees are investing new money, not the money that is already in their IRAs and 401(k)s. Why? Because none of the retirement plan money is going to be taxed at capital gains rates. It is a tax-deferred investment that is taxed at regular income tax rates upon withdrawal. The gains in Roth IRAs are not taxed at all — which is what makes them attractive, though somewhat limited in accessibility since you have to make less than $150K to invest in them.
It does sound better that such taxes would be eliminated only for those making less than $250K. But I have to ask why you would eliminate a tax on passive income while continuing to tax earned income. There seems to be a common misconception that capital gains taxes are lower because they are effectively taxing the same income twice. I’d like someone to explain that to me. I have been filing tax returns for decades and never have I been taxed twice on the original money I invested. You are only taxed on the difference between what you put into the investment and what you got out of it. If you initially invested $100 and you cashed out of your investment at $120, you would pay tax on $20, not $120.
One other possible side-effect of eliminating capital gains taxes at some level is that it could create a new class of investor — middle income people hoping to avoid taxes by shifting their focus (over time) to managing their personal portfolios rather than earning income. Maybe this is part of a jobs plan – reducing competition for mid-level jobs. Or maybe nobody really thought this through, or worse, it’s just electioneering and is not really a serious proposition.
