CaptainMidnight, I agree in principle with most of your points. As for capital gains rates, sure, I consider holding things longer if I've got a gain, or try to sell an offsetting loss just like everybody else. But when an investment reaches a point where it is no longer attractive, I sell it and so will everybody else. Originally Posted by TexTushHogMaybe, maybe not.
If you were to merely return the cap gains tax rate to 20% (where it was before it was cut to 15% in 2003) it probably wouldn't make a lot of difference to anyone's sell/no sell decision. But if you were to raise it to 35% or 40%, for example, many people would make some very different decisions. History has shown that quite convincingly.
In marginal cases, significant increases will cause more long term holding of stock. But why is that necessarily bad? Originally Posted by TexTushHogIt's hard to say that it's "necessarily bad", but high cap gains tax rates can cause what's called a "lock-in" effect. People have long debated the extent to which the capital gains tax rate impedes the flow of capital to its highest and best use, and the extent to which it may affect economic growth. Some politicians disingenuously make the exaggerated claim that raising the rate at all would "completely destroy capital formation", while those on the other side claim that a cap gains tax rate lower that that on ordinary income does not serve any purpose and is a "giveaway to the wealthy."
Suffice it to say that the dynamic relationship between the capital gains tax rate, capital formation and allocation, and economic growth is quite complex and hardly capable of being easily or effectively modeled. This CBO piece from 2002 addresses a few key points:
http://www.cbo.gov/doc.cfm?index=3856&type=0
You might also note that although Europe's social democracies hardly are lacking in desire to impose high taxes on the wealthy, they apply a lower tax rate on capital gains. There are good reasons for that.
