John Ransom
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Ericynot wrote: Part of what Buffett proposed in the so-called Buffett Rule is raising the tax rate on capital gains and dividends to the level of ordinary income. Re-read my original post from 11:19 AM. You're confused and so, apparently, is John Ransom.- Obama’s Campaign about Nothing

Dear Comrade Eric,

No, I’m not confused. I think perhaps you don’t understand how tax law actually operates in real life.

Even assuming that the Buffett rule raises taxes on capital gains, there are easy ways for rich people to avoid paying capital gains taxes.

Unlike income taxes, a person can choose when to incur capital gains taxes.

The way Buffett chooses is by buying stocks and holding on to them for a really long time. Until he sells, there is no capital gain event- hence no taxable event. This is a common way that financial advisors routinely minimize the tax burden of people who fall into upper incomes. They buy companies and hold for long periods of time and much more rarely seek to realize capital gains, because the tax makes a big difference in total return.

You may say so what? The “so what” is that by punishing the realization of capital gains you stop the market from being more liquid, thereby not utilizing capital more often. In other words, you need more capital to get the same amount of liquidity. 



You also raise less money with higher capital gains taxes.

From Heritage:

In 2003, capital gains tax rates were reduced. Rather than expand by 36% as the Congressional Budget Office projected before the tax cut, capital gains revenues more than doubled to $103 billion.

The CBO incorrectly calculated that the post-March 2003 tax cuts would lower 2006 revenues by $75 billion. Revenues for 2006 came in $47 billion above the pre-tax cut baseline.

Here’s what else happened after the 2003 tax cuts lowered the rates on income, capital gains and dividend taxes:

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John Ransom

John Ransom is the Finance Editor for Townhall Finance.