I haven’t paid much attention to the presidential race, but something related to it in the Wall Street Journal caught my eye. Apparently there is such a thing as ‘phantom’ capital gains now and one Rudy Giuliani wants to make sure you’re not taxed on them. So what, you may ask, are phantom capital gains and why should you care?
‘Phantom capital gains’
The term ‘phantom capital gains’ refers to the fact that when you sell appreciated assets (e.g. stocks), you pay capital gains tax based on your basis (the price you paid for them whenever you bought them). Since then inflation has likely eroded the buying power of the dollar. So now that you’re selling them, the cash proceeds you receive are worth less in ‘real’ terms. You must pay taxes on any gains, regardless of that gain’s real buying power. With me so far?
Rudy Giuliani and other anti-tax advocates think people should not be taxed on the full nominal amount of those capital gains. In Giuliani’s plan, the capital gains that are subject to taxation would be indexed for inflation.
It’s a question of who wins and who loses…again
I have to admit, as a stock-owning citizen of these United States, when I first read about it, I was enticed by the idea. Paying less in taxes appeals to everyone’s basest instincts. But as I continued to read the WSJ article, I realized this was a very bad idea indeed.
You see, as I thought about the plan, it occurred to me that although my family owns way more equities than the average person in the U.S., this plan wouldn’t do much for me personally. Most of the stock I own is in tax-advantaged accounts like IRAs and 401(k)s already. Indeed, this is the case for the overwhelming number of people who own stocks in this country at all. Yes, we have a taxable investment account. But its contribution to our overall net worth is relatively small.
And we’re decidedly in the minority of families. Many own no stock at all (about 50% do). Of families that do own stock, many don’t own very much. And, again, most likely they hold it in already tax-advantaged accounts.
Consider that the median (half below; half above) 401(k) account balance in 2006 was $66,650 according to the Employee Benefit Research Institute (EBRI), a well-regarded organization. (There’s a caveat to that number, however. The data only holds for people who held 401(k) accounts for the entire 1999-2006 time period. Many people either don’t participate in 401(k)s at all or did for only part of that time. I don’t want to commit data torture, but you get the point.)
So who would benefit from an indexing of capital gains to inflation? Drum roll please.
Not surprisingly, the wealthy will be the overwhelming winners if a plan like Giuliani’s becomes law. Doing something like this is the opposite of progress, to me. It increases rather than decreases wealth inequality. Whether you agree on whether capital gains taxes are good or bad at all is really immaterial. A tax like this overwhelmingly benefits those most able to pay taxes.
Let me emphasize at this point that a plan like this would benefit me personally. That’s important, because I’m not saying “tax the other guy” as is so often the case. I just think our tax system ought to be progressive and I’d like to see income and wealth inequality in this country shrink instead of grow.
But that’s just me.
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