This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
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?

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
AAPL $126.35 2.50%
FB $82.89 -0.49%
GOOG $549.36 0.19%
TSLA $190.42 2.90%
YHOO $44.95 -0.33%


DOW 17,890.79 -85.52 -0.48%
S&P 500 2,086.24 +25.22 1.22%
NASDAQ 4,947.4410 +56.2220 1.15%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs