[gnicholas]

Should social security and medicare taxes apply to capital gains? Should these taxes apply beyond the current caps, which are a bit over $100k? If not, there would be very little impact since most investment income is earned by people who also have six figures of wage income. And if so, then we'd have to levy these 'taxes' (they're not quite taxes, to the extent that these are paid in exchange for later services/payments that the taxpayer receive) on all wage income.

[s1artibartfast]

Why do taxes besides social security and medicare have very little impact? Taxing capital gains like income would have a significant impact.

Federal income tax caps out 37% and california income tax caps out out 13%.

[gnicholas]

Because the amount you pay into social security and Medicare are quite large in terms of percent of income, if you make less than $100k. Of course, you later get paid SS or receive Medicare services, which makes it less clear that these items should be considered taxes.

[s1artibartfast]

Sorry, but I genuinely am missing the point you are making. I agree that SS and medicare are large taxes for those making less than 100K. Are you saying that this is a reason we should not increase capital gains and should instead increase SS and MC?

[gnicholas]

I was pointing out that you would have to increase CG rates by a lot if you wanted them to be higher than OI rates (and you count SS and Medicare in the OI tax rate).

If you do that, you would want to increase the rate on OI as well, otherwise people would play games because of the rate differential (take money out of a business as salary instead of CG, for example).

And lurking in the background you have the timing/inflation issue, which is that OI is taxed every year and CG is taxed in nominal terms upon sale. So you end up potentially paying lots of tax on nominal increases in value that are actually just inflation. The fact that CG is not inflation-adjusted is one of the rationale for having a lower CG rate.

[s1artibartfast]

Thanks for clarification. People already play tons of games substituting CG for OI, so so bringing them closer to parity could reduce this.

I hadn’t considered the inflation issue, which is interesting but seems solvable.