Capital Gains

The current U.S. tax law provides a special rate for capital gains. This should be eliminated. The implied purpose of the tax savings is to encourage risk taking through capital investment. But since the term for these “long-term” capital gains is only one year, I fail to see how they are different from ordinary gains or losses on inventory. And no more risky than choosing to work at a non-capital trade.

Besides what else is a person with capital going to do. They can spend the money on consumption, they can loan the money to a borrower, or they can purchase ownership in an income producing asset.

Spending the money provides income to those who produce the items consumed.

Loaning the money provides a stream of income through the interest charged.

The income producing asset may or may not provide additional jobs for others.

For example, investing in the stock of a company does not provide any capital to the company that issued the stock after the initial public offering (IPO). It can provide an opportunity to issue new shares to raise capital but the original shares are just the right to collect the income stream from that original investment (and particpate in liquidation should that occur). The jobs have already been created through the initial investment or through business growth provided by retained earnings.

Starting a new business takes capital. And there is a risk in starting a new business. It is hard work and requires a bunch of time and attention. But the statistics show that about 1/3 of businesses started make money, 1/3 break even, and 1/3 lose money. But should the taxpayers be part of the reward structure? I don’t think so.

It is time to treat capital gains, regardless of term as ordinary income. The gain can be declared when recognized or when realized. This means that you can work out the number every year (and every business person already does this) and pay the tax on the increase or subtract the loss from your income. Or you can save it all up and take it all at once when the business is sold or liquidated. Of course you might not have any income to deduct the loss from when you go bust so you might want to use the pay-as-you go method.

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