Capital Gains: ELI5
An Idiot's Opinion
What are capital gains?
When you sell a stock for a profit, that profit is considered a capital gain.
If the time between when you bought the stock and sold it is less than one year = short-term capital gain = taxed as ordinary income (whatever tax bracket you fall into).
If the time is more than one year = long-term capital gain = taxed at a lower rate (historically).
On Thursday, President Biden announced plans to propose an increase in the long-term capital gains tax rate for those earning $1 million or more to 39.6%
The current maximum rate for long-term capital gains is 20%
This is my attempt to ELI51.
Why does the White House want to raise the tax rate?
They need to fund their $4T (with a T) plan to reshape America somewhere. This would raise significant revenues, while “only affecting 0.32% of American taxpayers.”
An Idiot’s Opinion
This is well-intentioned, but I think it would be like cutting off a limb just as the country is seeing light at the end of this…shit tunnel.
The “only 0.32% of Americans would be affected” talk is misleading. This tax also applies to companies.
There are 3 key consequences I see if it were to pass:
Diminished investment 👉 anytime you tax something, you punish it
Investment drives GDP, productivity growth, and deficit reduction - Clinton lowered the rate from 28% to 20% in the mid-90s, and it had positive effects on all 3
Risk tolerance will change 👉 entrepreneurship = stifled
Higher capital gains = less capital for investments
Less capital for investments = less risk = less innovation
Uber, Airbnb, Pinterest, Amazon, Stripe, Doordash, Lyft, Instacart, Grab, Lemonade, Robinhood, PayPal, Square, WeWork, SoFi, etc.
The companies that will be providing the jobs for the next 100 years aren’t funded by government dollars.
They’re funded by RISK capital.
Add to the risk by raising rates and you crush all that opportunity.
Inflation 👉 already a concern
This proposal raises taxes on businesses (who can afford it)
Shockingly, businesses (for-profit organizations) historically pass those costs on to consumers (who can’t afford it) = higher prices
Unattractive markets (because of the high rates) = more spending = higher demand
What will happen?
This is a bad idea, and I think it’s unlikely to pass.
I think President Biden threw out this obnoxiously high number because it’s good politics.
“Taxing the rich” always plays well to the left, but the reality is that such a radical tax hike would do more harm than good.
The government is essentially saying, “we’ll spend this money better than you will.”
I don’t think so.
More likely is a compromise (maybe in the mid-high 20s), or no change at all.
But then again, I write a newsletter filled with memes and gifs. What do I know?
“Explain like I’m 5”