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Resolved: The United States should abolish the capital gains tax.
in Economy

By agsragsr 852 Pts edited January 2018

Resolved: The United States should abolish the capital gains tax.

I will take affirmative position on the debate that United States should abolish the capital gains tax.


It is key for us to define that we are not looking to replace this tax with something else.

The 2 primary benefits will be

  1. Economic growth - since it encourages investment and higher risk taking, we should expect people to actually spend vs saving money
  2. Society well being - capital gains tax is  inefficient form of taxation to be applied towards public well being (like improving transportation or building hospitals).  The cost of collecting this tax is also high since there is complex administrative overhead involved.
This article, provides good insights on the topic

The Overwhelming Case Against Capital Gains Taxation
  1. Live Poll

    Resolved: The United States should abolish the capital gains tax.

    8 votes
    1. The United States should abolish the capital gains tax.
    2. Resolved: The United States shouldn't abolish the capital gains tax.
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  • Capital gain taxes is an inefficient way to impose taxes and is an example of double taxation.  Investors already payed income tax on their investment dollars and shouldn't have to pay again on gains.  What makes it even more unfair is that there is a limit of writeoff for capital gain loses, making risk appetite unsymmetrical.
    I suggest we drop capital gain taxes and simplify our tax code to avoid double taxation.
  • I will argue negative side of this position. Thank you for creating this debate.  I actually believe that capital gain tax is a fair practice and it's not double taxation.  
    Abolishing capital gain tax will not serve any purpose in the United States.

    This article argues why progressive income redistribution is actually required to resolve inequality in the United States. If the United States abolishes Capital Gain tax - the benefit of economic growth won’t benefit the poor in a meaningful way, but would just be a change for sake of change.
    Why stopping tax reform won’t stop inequality.  

    As a matter of fact United States should increase the taxes for the higher income population. 
    Please see the article below.

    Eliminating capital gain tax will just do the opposite.

    Finally, low capital gain tax really provides unfair benefit to the rich, ans that is not something an effective taxation system should aim at.
    WhyTrump - a good question
  • @WhyTrump
    thanks for your arguments.  
    You anchor your position on a point that capital gain doesn't benefit the poor, but that's not really the goal of a taxation system to be effective.

    There is a skewed definition of "the rich" and "the poor" and it is not effectively defined in today's society.  
    Luckily we don't live in a socialist country and there is nothing wrong with aiming to be "rich". In many ways that's actually definition of American dream and what drives productivity and innovation.  

    Check out this older article that explains why capital gain taxes are unfair.  While it's from 1994, it does a great job of explaining why aboloshing the capital gains tax in the US will be a smart and fair thing to do.
    Live Long and Prosper
  • @agsr
    you are trying to make a point that capital gain tax is unfair, but you fail to address how it's making our top 1% even richer at expense of the poor.

    investments that do well is a form of income.  We know that historically equity holdins appreciate in value at about 8% a year.  If we don't tax these capital gains then we need to tax our poorer population more to fill the gap.  It's not just a gift to the rich, we really need to be thoughtful of those in need.
    WhyTrump - a good question
  • @WhyTrump, please help me understand how it can be fair to tax in top of tax? You insist that the system should be fair, and center your argument around rich vs poor, but it should be centered around overall efficiency snd fairness to all taxpayers. I don't subscribe to socialist theory that looks to normalize income of rich and poor.  
    Live Long and Prosper
  • I support capital gain tax in the United States.  I believe that there should be dramatic evidence if we were to change a well-established taxation system. 
    Position that capital tax gain taxation is all about rich vs poor is misleading. Capital gain tax is a form of income, as it can be financially engineeringed to produce income from investment. If capital gain tax is abolished then it will provide a source of tax free income and will also create a stock market bubble, impacting risk/return equilibrium.

    I just don't see indisputable evidence in this argument of removing the tax.
  • Also to add to the con argument is that aboloshing the capital gain tax will result in more sophisticated investors finding ways to take advantage of tax loopholes to get tax free income.  Again, skewing towards the rich sophisticated part of population.  We already have 1% of population own half of the wealth (, and abolishment would make the gap even more.
  • @lexman, you are taking your argument in two ways:
    1) sophisticated investors will abuse the system to avoid taxes
    2) there should be indisputable evidence to change the system.

    let me please address each one of your points.
    1) the US government is actually abusing current investors by fully taxing capital gains and limited tax writeoffs to only $3k annually. That doesn't sound fair fair to me.  
    2) For any topic to find indisputable evidence is really challenging, as we can be arguing in circles forever.  It's not criminal court where there should be proof beyond reasonable doubt.
    Live Long and Prosper
  • @WhyTrump and @lexman

    Jason Clemens, Charles Lammam, and Matthew Lo have produced a thorough studyfor the Fraser Institute about the economic impact of capital gains taxation. Their study focuses on Canada, but the arguments apply in every nation.

    A capital gain (or loss) generally refers to the price of an asset when it is sold compared to its original purchase price. A capital gain occurs if the value of the asset at the time of sale is greater than the initial purchase price. ...Capital gains taxes, of course, raise revenues for government but they do so with considerable economic costs. Capital gains taxes impose costs on the economy because they reduce returns on investment and thereby distort decision making by individuals and businesses. This can have a substantial impact on the reallocation of capital, the available stock of capital, and the level of entrepreneurship.

    Live Long and Prosper
  • @whytrump
    I am fully supportive of eliminating capital gain tax.
    Your argument re impacting the poor reminds me of occupy Wall Street movement from years ago.
    please see below article

    It offers insightful analysis.
    As Occupy Wall Street protesters deliberate over a policy agenda that would combat economic inequality and political favoritism, they will find no target better suited to their mission than the tax break for capital gains. Under current law, the maximum tax rate on profits from the sale of investments held longer than a year is 15 percent. That rate is substantially less than half of the 35 percent applied to ordinary income for the highest earners, who collect an overwhelming share of taxable capital gains. Reforming the tax code to abide by the simple principle that income from investments should be taxed at the same rate as earnings from work would greatly enhance the fairness of the tax system while eliminating myriad economic distortions. 
  • Capital gain tax is an important source of revenue to the Untited States and should be retained.  It is only fair to tax investments once they are sold if profit is made.  The taxation is only in place for realized gain at disbursement.
    I agree though with @agsr point about unfairness of deduction limit, although in reality the deduction limit of $3K is annual until full amount of loss is written off.
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  • islander507islander507 191 Pts
    edited February 2018
    @ale5, having a source of revenue for IRS is important, but can't be an absolute measure.  
    If the capital gain tax is abolished then it will encourage more aggressive investments and entrepreneurship, resulting in overall higher growth and therefore tax revenue.  
  • The article listed in the opening argument is really good. 
    I am against capital gains tax.  You need to get into specifics to understand why.

    The Overwhelming Case Against Capital Gains Taxation

    It turns out that there are many reasons why the capital gains tax harms economic performance. Clemens, Lammam and Lo explain the "lock-in effect."

    Capital gains are taxed on a realization basis. This means that the tax is only imposed when an investor opts to withdraw his or her investment from the market and realize the capital gain. One of the most significant economic effects is the incentive this creates for owners of capital to retain their current investments even if more profitable and productive opportunities are available. Economists refer to this result as the "lock-in" effect. Capital that is locked into suboptimal investments and not reallocated to more profitable opportunities hinders economic output. ...Peter Kugler and Carlos Lenz (2001)...examined the experience of regional governments ("cantons") in Switzerland that eliminated their capital gains taxes. The authors’ statistical analysis showed that the elimination of capital gains taxes had a positive and economically significant effect on the long-term level of real income in seven of the eight cantons studied. Specifically, the increase in the long-term level of real income ranged between 1.1 percent and 3.0 percent, meaning that the size of the economy was 1 percent to 3 percent larger due to the elimination of capital gains taxes.

    Then the authors analyze the impact of capital gains taxes on the "user cost" of capital investment.Capital gains taxes make capital investments more expensive and therefore less investment occurs. ...Several studies have investigated the link between the supply and cost of venture capital financing and capital gains taxation, and found theoretical and empirical evidence suggesting a direct causality between a lower tax rate and a greater supply of venture capital. ...Kevin Milligan, Jack Mintz, and Thomas Wilson (1999) sought to estimate the sensitivity of investment to changes in the user cost of capital...and found that decreasing capital gains taxes by 4.0 percentage points leads to a 1.0 to 2.0 percent increase in investment.

    Next, they investigate the impact on entrepreneurship.

    Capital gains taxes reduce the return that entrepreneurs and investors receive from the sale of a business. This diminishes the reward for entrepreneurial risk-taking and reduces the number of entrepreneurs and the investors that support them. The result is lower levels of economic growth and job creation. ...Analysing the stock of venture capital and tax rates on capital gains from 1972 to 1994, Gompers and Lerner found that a one percentage point increase in the rate of the capital gains tax was associated with a 3.8 percent reduction in venture capital funding.

    Last but not least, the authors also discuss the impact of capital gains taxation on compliance costs, administrative costs, and tax avoidance. They also look at the marginal efficiency cost of capital gains taxation and report on some of the research in that area.

    Dale Jorgensen and Kun-Young Yun (1991)...estimate the marginal efficiency costs of select US taxes and find that capital-based taxes (such as capital gains taxes) impose a marginal cost of $0.92 for one additional dollar of revenue compared to $0.26 for consumption taxes. ...Baylor and Beausejour find that a $1 decrease in personal income taxes on capital (such as capital gains, dividends, and interest income) increases society’s well-being by $1.30; by comparison, a similar decrease in consumption taxes only produces a $0.10 benefit. ...the Quebec government’s Ministry of Finance...found that a reduction in capital gains taxes yields more economic benefits than a reduction in other types of taxes such as sales taxes. Reducing the capital gains tax by $1 would yield a $1.21 increase in the GDP.

  • First, it should be noted that all taxes create an economic inefficiency by creating a wedge between producer and consumer prices. However, the Federal Government does require some form of tax in order to provide services. Therefore, the question should really by whether the capital gains tax is more or less efficient than other taxes. 

    The linked article provided the following evidence against the capital gains tax:

    1. The capital gains tax disincentives investors from switching their investment to a more profitable venture. However, since the tax is not on gross capital gains but net capital gains, the tax incentivizes investors to sell their least profitable venture to offset any additional taxes. After all, if an investor was switching their investment, they would naturally sell the worst investment.

    2. The administrative costs are significantly higher for capital gains taxes than consumption taxes. The main evidence is that, on average, the marginal administrative costs are almost 3.5 times as high. But why? Capital gains taxes are a lot more easy to "game". Legally avoiding a consumption tax is much harder. The solution is a simplification of the law; complications such as long-term vs. short-term investments create more opportunity for expensive accountants to avoid tax.
  • Any form of taxation necessarily leads to reduction of the affected economical activity, as it inflicts unrecoverable losses on all parts of the economical contract and leads to a drastic reduction of the return/investment rate, removing incentives to participate in this activity from the affected entities.

    Individual income tax is widely regarded as the most efficient taxation form, as it effectively slices all economical activities equally, hence the balance between those activities mostly does not change significantly - with the exception of the segments of the market that feature a very small marginal return and that become nearly unprofitable with extra taxation.

    On the other hand, the capital gains tax negatively affects a specific set of industries, such as private real estate trade or stock market. As the supply/demand balance in those industries shifts, while remaining the same in other industries, the actors are strongly encouraged to abandon those industries in favor of the less taxable ones - and as a result, the market experiences a shortage of a group of the essential economical activities, leading to market imbalance and, in turn, slowing down the economical growth and sending ripples across all economical sectors. Without the capital gains, the market participants cannot satisfy their needs without being punished for it, and that skews their interaction with the market.

    All kinds of trade/sales taxes/tariffs have a very detrimental effect on the market - and ideally should be abolished. Capital gains tax is merely one of them, although arguably one of the more important ones.
  • Would those in favor of abolishing the capital gains tax also be in favor of getting rid of taxes on gambling and lottery winnings?
  • MayCaesarMayCaesar 1793 Pts
    edited November 2018
    @WordsMatter ;

    I am in favor of abolishing all taxes and having the government ventures funded through private charities and crowd funding campaigns, so people know what it is exactly they are spending their money on, rather than putting the money into the black hole and hoping that the hole produces a bigger return.

    Or, at least, if they are forced to pay the taxes, then they should choose what their investment is spent on directly. Electronic democracy organized this way would be much more effective than any of the current systems.

    That said, even in the current system abolishing taxes on gambling and lottery winnings is a given. Gambling industry is extremely effective at attracting investors, and such places as Las Vegas or Macau tend to feature the highest quality of life on Earth. Taking the government out of the equation would take these already exploding places into space.
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