Presently, the long term capital gains rate is 15% for taxpayers in the 25% marginal tax rate on up (the rate is 0 for the 10% and 15% marginal income brackets) and is set to expire in 2010, returning to 20%. President-elect Obama seems comfortable with the 20% rate but has hinted at possibly a 28% rate on long term gains. Short term gains, less than a year, are taxed at the seller's income rate.
What does all this mean? Given the fact the market has taken a nosedive there probably will not be too many 'gains' to tax. If sold, I suspect many will have losses, or investors may simply choose to hold their investments, hoping to recoup their losses. Take note losses can carry forward to the next year.
So why does the rate matter? Well there are several theories out on capital gains. Obviously if you raise the tax rate the government will raise more revenue per profitable sell. However, this doesn't necessarily lead to more total revenue.
If investors are taxed more on their investments they may simply choose to hold on to them longer or simply not invest at all. This will lead to less buying and selling and less revenue for Uncle Sam.
Lower capital gains rates may net less money per sell but will increase total tax revenue because there will be more buying and selling in the market.
An article on the National Center for Policy Analysis states:
Over the past 30 years a consistent pattern has emerged: every time the capital gains tax has been cut, capital gains tax revenues have risen. Every time the capital gains tax has been raised, capital gains tax revenues have fallen (1)
The new administration should take a look at history and realize that higher capital gains don't necessarily mean more revenue for Uncle Sam.
1. - NCPA.ORG - "The Bush Capital Gains Tax Cut after Four Years: More Growth, More Investment, More Revenues" <http://www.ncpa.org/pub/st/st307/st307f.html >
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