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TheStreet Open House

The 15% Capital Gains Tax Myth

NEW YORK ( TheStreet) -- In his State of The Union Speech, President Obama called for some Americans to pay a minimum income tax of 30%. Yes, you heard that right -- a minimum tax. He did NOT propose a maximum tax of, say, $3,000 per person per year, but rather a minimum tax.

Remember the old robber's demand: "Your money or your life!" In Obama's new parlance, it's now "30% or jail!" I wonder what George Washington would have said about this new paradigm.

The fact that Obama is calling for a minimum tax as opposed to a maximum tax tells you all you need to know about this man and his view of your right to keep the fruits of your time and effort.

But practically speaking, what does Obama mean with his call for a minimum 30% tax? What he is really talking about is to raise the long-term capital gains tax from 15% to something closer to the top income tax rate, which is over 30%. Basically, although he doesn't say it in those exact words, he is asking for a doubling of the capital gains tax rate. Some way to talk around the issue!

All this talk about "tax fairness" is political in the context of Warren Buffett's claim that he pays less tax than his secretary, and of course that it's somehow a problem that Mitt Romney pays close to 15% rather than 30%-something. Let's leave aside the discussion of whether capital gains should be taxed at all, since the money has already been taxed at least once and arguably twice or three times already: Is the 15% capital gains rate comparable to an equivalent rate on labor income?

Tax on labor is paid on every paycheck, typically twice a month. You make, say, $2,000 pre-tax per pay stub, and you pay 15% tax -- $300 -- on that amount. Nothing unusual here. Pretty straightforward.

But how does that 15% capital gains tax work? Let's say that you're saving for your kid's -- or your grandkids' -- college, and you buy a stock for $100. One year later, the stock has surged to $200, and you sell. You pay 15% tax on the $100 profit. That's a 15% rate, right?

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