A Simple Proposal

With the all the brouhaha over Mitt Romney's tax return, and the President's State of the Union address, much has been lost about why some rich investors pay such a low rate.  The media and politicians always seem to miss that it is the simple fact that capital gains are treated differently than regular income.  Should it be, well that depends on your perspective, but there are several legitimate reasons why it is.  Such as:

1.  They have already been taxed, both when the original capital was taxed as income, and at the corporate level, which on the books at least, is one of the highest in the world.

2.  They are not indexed for inflation. If, for example, you have an investment which makes a 30% return over a period of time when the inflation was 40%, you not only lost 10% in real terms, but you get the pleasure of paying a tax to the government for the honor.  Not exactly fair.

3.  They are not riskless.  If you receive a paycheck, the worst thing that can happen is you are laid off, and your pay goes to zero.  If you invest $1 million and receive an income stream off of it, you not only lose your income, but you can lose your $1 million.  If you make a million you have to pay taxes on that income, but if you lose that same million, the government does not cut you a check for that same amount in taxes.

So while I can understand why some people argue that for fairness, the very rich at least, should have to pay a higher capital gains right, fine, first just address the 3 issues I have raised above.  Raise the capital gains rate to the same as income, but first cut the corporate rate to 15-20%, in line with the rest of the developed world.  Then allow capital gains to be indexed for inflation, and finally allow capital gains losses to be offset against regular income.

Anyone think the president will actually propose any of these?  Nah... didn't think so.