We believe they are important enough to overwhelm the negatives of the tax rate increases on income, capital gains and dividends, and they create an important foundation for equity gains in 2013.
But a good slice of the blame for the housing boom must go to the Howard government which, in effect, slashed the tax rate on capital gains to half the top rate of income tax, luring a mountain of speculative money into property.
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Last year's budget agreement tacked an additional six months onto the time an individual must hold a financial asset in order to have the lower capital gains rate applied instead of the regular income tax rate.
Decision Economics, Inc. (DE) undertook an economic study to examine the potential effects of various scenarios where the legislated tax-rate increases on income, dividends, capital gains and social security take place.
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But unlike all of those folks, they are getting paid with this carried interest and paying tax at a lower capital gains rate instead of the usual ordinary income rate.
The top rate of capital-gains tax is currently 28%, over ten percentage points lower than the top rate of income tax (39.5%).
Upon the ultimate sale of the property, basis-adjusted profit is taxed at the current capital gains rate, typically lower than income tax.
The capital gains rate, which taxes the majority of the income the super wealthy earn, is 15%.
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He stands in the way of America's desperately needed fiscal nourishment: a cut in the capital-gains tax rate and retroactive cuts in income tax rates.
Taxing capital income at a permanent average rate of 20% instead of the current average of 37% would yield substantial benefits.
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Consumers have borrowed more money against the rising value of their homes, allowing them to extract some of their capital gains and so spend more than their income: the saving rate has fallen from 9% in 1990 to minus 2% last year.
As governor of New Mexico he reduced the state's top income tax rate by 40% and the capital gains tax by half.
Whereas low-income people would have a great ROI but do not have the capital, high-income people are faced with a poor ROI because of their tax rate.
In 2011 and 2012, half of the carried interest would be taxed at the ordinary income rate, with the remaining 50 percent eligible for capital gains treatment.
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In other words, over a span of 53 years, we reduced the top income tax rate by more than 60% and cut the top capital gains tax rate by 40%, and revenues as a percent of GDP went up.
As I pointed out here, because of the historically low 15% rate on long term capital gains (compared to a top tax rate of 35% for ordinary income, like salary) the 400 highest income Americans now pay a lower effective federal income tax rate than the merely well paid.
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If there is going to be a preferential rate for capital gains, people are going to try to structure as much of their income to take the form of capital gain as possible.
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