Tax reform and the capital gains tax.


I wonder at times if the Republicans are really interested in tax reform. When Obama raised the tax rate for dividends and capital gains the Republicans were livid. They told the American people that it would stifle investment. So one would think that their “tax reform” would, at least, remove the increase that Obama succeeded in getting through Congress.

Obama increased the capital gains tax from 15 to  20 percent [for people making $400,000 (individuals) or $450,000 (couples)]. He had wanted to raise it for those making more than $250,000 (couples) or $200,000 (single). However, in addition he created a new 3.8 percent surtax on investment income under Obamacare, thus making the tax on capital gains effectively, 23.8%. It is far worse for dividends and other such monetary gains that are taxed like income.

 

So what is the Republican plan for their “tax overhaul?”

[Source: Republicans’ Tax Plan Takes a Quirky Swipe at the Little Guys, by Larry Kudlow]

[From the Kudlow article] Republicans are supposed to be the party that cuts the job-killing capital-gains tax, not raises it. But because of a quirk in the Senate-passed bill, the tax on capital gains may go up — and for some types of long-held assets, fairly substantially.

Most members of Congress don’t even know of this stealth capital-gains hike.

Here’s the story. At the start of the year, Republicans promised to reverse the near-60 percent rise in the capital-gains tax under President Barack Obama — a hike that helped bring investment rates to historic lows. The GOP plan was to eliminate the ObamaCare 3.8 percent investment-tax surcharge on capital gains and dividends.

That repeal never happened. But now the Senate tax reform proposes to raise several billion over the next decade by changing the rules on how stocks are taxed.

It would require shareholders to sell their oldest shares in a company before their newest purchased ones. The older the share, the larger the taxable capital gain. This is called the first-in-first-out accounting system.

Consider this example. Let’s say you bought 100 shares of Apple stock in 1998 at $100 a share. And let’s say you bought another 100 shares in 2008 at $300. If you sold 100 shares at $500 a share, you would have to “sell” the oldest stock and pay a $400 per share capital-gains tax, versus $200 a share under the current law… The actual capital-gains tax paid could more than double for many stock and asset sales.

The worst part of the Senate plan is that much of the so-called “gains” are “phantom” gains. The “gains” are not adjusted for inflation. Therefore, you pay taxes on “gains” that have been essentially eradicated by inflation, but the TAX REMAINS THE SAME.

Again, are these really Republicans that are “reforming the tax code?” Indeed, there is more bad news for smaller investors in the Senate plan and I encourage you to read Mr. Kudlow’s excellent article in its entirety.

Roy Filly

 

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About Roy Filly

Please read my first blog in which I describe myself and my goals.
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