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Capital gains should be taxed as ordinary income.

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Voting Style: Open Point System: Select Winner
Started: 4/4/2016 Category: Politics
Updated: 6 months ago Status: Post Voting Period
Viewed: 200 times Debate No: 89140
Debate Rounds (5)
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Very straight-forward prompt - should capital gains be taxed as ordinary income? Today the long-term capital gains rate is 15% for most investors (with income btw $37k-413k), and maxes out at 20% for those who fall into the highest tax bracket (earning more than $413k, and whose marginal rate is 39.6%).


{Full disclosure to readers: my friend and I are exploring this platform to decide if we want to use it for our grad school debate club, so we're literally sitting next to each other having the debate. Please forgive the relatively limited actual arguments, as we're really just testing out the platform}

I will seek to demonstrate the negative case that capital gains should NOT be taxed as ordinary income. There are two primary arguments for treating capital gains differently.

First, long-term capital gains by definition apply to assets that an individual has purchased with post-tax income, and so the capital gains tax is really a double-taxation on the original source of income.

Whether those assets are physical by nature (cars, houses, etc.) or whether they are intangible (stocks & bonds, etc.), the income used to purchase those assets was initially taxed when the individual earned that income originally. For example, let's say that I make $100,000 in gross income per year and have a 20% effective tax rate. I use $20,000 of my post-tax dollars to put toward the downpayment on a $200,000 property. Two years later, the housing market has done pretty well and I decide to sell my property for $225,000. Ignoring brokers' commissions and assuming an interest-only mortgage for simplicity, I'd have recorded a capital gain of $25,000, as my $20,000 of equity has become now $45,000 of equity. Even though I already paid $5k in tax on my original $20k of equity, the capital gains tax is going to knock it down further by taxing the appreciation by another 20%, costing me another $5k. When all is said and done, I've paid twice as much tax on my original income because I decided to save & invest it.

Second and relatedly, this double-taxation effect encourages spending rather than savings and investments, which the government ought to be incentivizing.
Debate Round No. 1


While "double taxation" sounds like something to be avoided, the reality is that individuals (and corporations) will always have an incentive to invest so long as there are sufficient prospects for a return on their investment. In the housing example given, even with the capital gains tax of 20%, the hypothetical homeowner was still able to double the value of their original $20,000 investment. While turning $20k into $40k may be less desirable than turning $20k into $45k, the reality is that the incentive to invest is still there.

On a higher-level the debate prompt is not just about whether capital gains should be taxed, but whether they should be taxed at the same rate as ordinary income. Today, there is a substantial difference in the long-term capital gains rate and the ordinary income tax-rates. Because wealthy citizens earn a substantially disproportionate amount of their income from capital gains, this in turn makes the capital gains rate function as a giant tax break for the wealthy. For example, let us consider two hypothetical individuals.

Harry Hardworker is a general contractor. He works 60 hours a week and gets paid well for his time, earning a handsome $150,000 per year. Given his relatively high income, he has an effective tax rate of 30% and thus pays $45,000 a year in taxes.

Retired Ralph, a former investment banker, no longer works a 9-5pm job. He has a few million in assets that allowed him to retire at age 45, and earns an identical $150,000 per year in income from his portfolio of stocks and bonds. Ralph does not partake in any short-term trading, since he knows it is disadvantageous tax-wise, and so his effective tax-rate is only 15%. He therefore only pays $22,500 a year in taxes.

As you can see, two individuals earning the same "income" end up with grossly different tax obligations. Many would argue that Harry is contributing far more directly to the economy than Ralph, and yet Ralph pays half as much in taxes.


Not only are capital gains a double-tax on income, because the investor already paid tax on that money once, capital gains are applied disproportionately to America's business owners, who are responsible for creating the majority of jobs in this country.
Debate Round No. 2


The myth of tax cuts (removing the capital gains tax would be a huge tax cut to the wealthy) for the wealthy is good for the economy because they are the "job creators" has been thoroughly debunked by the last 3 years since we sailed over the supposed fiscal cliff in January 2013. As a quick refresher, the fiscal cliff was the term used to describe the expiration of the Bush tax cuts that Obama had extended upon taking office, which included restoring the capital gains rate back to 20% (from 15%) for those earning over $400k, and increasing the peak marginal rate on the highest income earners from 35% to 39.6%. Conservatives warned that this looming fiscal cliff would handcuff our nations "job creators" and force us back into a double-dip recession.

While the chart linked below (released with the jobs report last week) admittedly demonstrates only one large data point from the curret business cycle, and so I would acknowledge it doesn't prove that increasing the capital gains rate ALWAYS has no impact on job creation. But it does at least confirm that converse is also not true. Based on the continued strength in the job market post-fiscal cliff, we can at least be confident that raising the capital gains tax is not always a bad thing. In the case of the last 3 years, it has appeared to be pretty non-consequential.;


The tepid recovery in the American economy is a testament to how resilient and innovative American businesses are. Just imagine how many more jobs would have been created if the capital gains tax were eliminated!
Debate Round No. 3


Let's take another hypothetical scenario. Rational and self-interested business owners will pursue the actions that they expect to maximize their outcomes. Faced with two possible business decisions, the same choice will be made regardless of whether there is a capital gains tax.

Hypothetical context
  • Decision A: invest $300,000 in a new store location and higher 10 employees to run the store. This decision will produce steady cashflows of $50k per year. You plan to retire in 15 years, so your time-horizon and multiple-on-earnings is 15x. Thus, this $300,000 investment is thus worth $750,000 to you, for a gain of $450,000 pre-tax.
  • Decision B: make a less risky (with lower expected reward) and just invest it in a diversified stock portfolio. You can invest the same $300,000 into the market and not higher any more people, and you'll still generate some healthy returns. The expected outcome is that in 15 years your portfolio will have doubled to $600,000, for net-present value gain of $300,000.
Clearly decision A is best for maximizing your self-interest, as everyone would choose $450,000 over $300,000. Nowl let's see if tax policy could possibly change the equation.

Scenario #1 -- current capital gains rate of 20% (today)
  • Your $450,000 gain is taxed at 20%, so $90,000 goes to Uncle Sam. This leaves you with $360,000.
  • In the low-risk scenario, you still pay the 20% tax on your $300,000 gain, or $60,000. Leaves you with $240,000.
  • Decision A is still clearly superior ($360 > $240)
Scenario #2 -- capital gains taxed as ordinary income (40%)
  • Decision A results in a tax bill now of $180k, and you're left with just $270,000.
  • Deciion B results in a tax bill of $120k, leaving you with $180,000.

Decision B never becomes the optimal scenario. Sure, we would all prefer to pay less in taxes since we then get to keep more. However, higher tax rates don't actually change the set of possible decisions you have, and you will always choose the decision that maximized your self-interest.



But what is your time as a CEO worth? In the current tax scenario, going through all of the effort of opening a new store and hiring people is going to net you $120,000 more than if you just went to the beach and let your money sit in the markets ($360k vs. $240k). I agree that most folks will keep working for that type of gain. But not everyone, because no one actually likes working hard, and passive investment income sounds pretty good too.

However, in the high tax scenario, going through all of that effort of running a business only is gonna make yoU $90k more than the passive investing strategy ($270k vs. $180k). For at least some CEOs, they'll look at that tradeoff and decide their time is more valuable, so they'll head to the beach and hang out.

Now think about if we eliminated the cap gains tax entirely. Then the same CEO is looking at a potential difference of $150k ($450 vs. $300) in reward for his time, since no taxes will be paid at all in either scenario. This is clearly the most likely to encourage the CEO to go ahead and invest his time in growing the business.
Debate Round No. 4


You do make a compelling point, which I think goes only to highlight that not all capital gains deserve to be treated equally. It also highlights how efficient our capital markets have become in allowing wealth to sustain wealth by simply investing it in the markets and putting your money to work passively.

However, I'd much agree that direct investments (by small/medium business owners who are making decisions about hiring & firing workers, etc.) are arguably more important to society than passive investment decisions.

As such, I would very much favor a reduced capital gains tax on small-business owners engaged in hiring new employees to grow their business. Perhaps for every new employee hired, busiesses are able to claim a deduction on their capital gains tax.

However, I don't believe it is government's role to dtermine how much individuals "want to work". There wil always be some who value their time more than money, and others who are always hungrier for more. In absolute terms, individuals generally decide to either work or not, and if they are working, they're going to maximize their self-interest. If in the high-tax environment, the CEO decides that his time isn't worth the effort to open the new location, then there's probably another entrepreneur out there who is willing to put their time into it. In fact, the original CEO's passive investment may find its way toward funding the hungrier entrepreneur, who wants to translate their effort and time into increased outcomes.

Finally, we should also keep in mind that there are obvious benefits to the higher tax environment, that come in the form of government spending. In the high tax environment, the government ends up with 20% more funds with which to educate & train the next round of entrepreneurs who are hungry & willing to go out and build businesses. As such, I rest my case that taxing capital gains as ordinary income would be best for the greater economic good.


My argument is plain and simple. Business owners create jobs. When we raise capital gains taxes on business owners, they have less incentive to continue investing their time & effort into creating jobs, and are more likely to just sit back and retire. Therefore, if we want to maximize the incentive for business owners to continue working, innovating, and hiring, then we should not raise taxes on them, and if anything should remove the capital gains tax entirely. As a reminder, all capital investments have already been taxed once when the income was earned as personal income, and so capital gains remain a double-tax. Double taxataion that reduces incentives for growth and hiring are bad for the overall economy, and so I urge a no vote on this resolution.
Debate Round No. 5
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