You work hard, earn an income and pay your share of income taxes. What you do with your hard-earned dollar next is your decision. However, the government influences your decision through our taxation system. You could choose to either spend your money or save it.
By increasing the capital gains tax, the government is discouraging you from saving and investing your money. The government is, however, encouraging you to spend your money at the mall. New Jersey does not even levy a sales tax on your new jeans.
What exactly is taxed by the capital gains rate? A capital gain occurs when an asset or a piece of property increases in value from the time you bought it to the time you sell it. You can owe capital gains taxes on real estate, mutual funds, stocks, bonds, collections (coins, sports memorabilia, cars), art, and the list goes on.
You could save your money and invest in CDs or the stock market. But the government will tax any profit you make on your investment. You could buy a second home in North Carolina or Florida, but the government will tax any profit you make when you sell your home (unless you declare it your primary residence for at least two of the last five years). If you sell your appreciated property within one year of ownership, any profits are taxed at income tax rates. Capital gains tax rates only apply if you hold onto your investment or property for more than 12 months.
Why should Congress keep the current capital gains rate? Any increase in the capital gains tax rate will negatively affect the growth of our economy significantly. It will reduce the incentive for anyone to invest in businesses, small or large. Our economy can only grow when our companies prosper and can hire more employees.
When you choose to invest in either a business or the stock market, you are investing in the future and you are taking a risk with your money. There is no guarantee that you will make a profit and you could, in fact, lose your entire investment. Taxing any profit at the same rate of income taxes reduces the reward or profit you receive if you invest wisely. If Congress chooses to reduce that reward by increasing the tax on it, then Congress reduces the incentive to make any investments in our country’s economy or future growth.
Jorie Johnson is a financial adviser with Financial Futures LLC in Manasquan.