Whenever the subject of increasing the capital gains tax from its current 15% rate comes up, you’ll invariably hear opponents breathlessly crying, “but that’s taxing the same income twice! Capital gains is double dipping!”
It’s a great line, and has proven powerful in debates. The only problem is, it’s 100% bullshit.
The capital gains tax is NOT a tax on income already taxed, it’s a tax on the ADDITIONAL income you earn by investing that income. For example:
- You earn $100,000. Yay!
- You are taxed 35% on it. Boo!
- You invest the remaining $65,000, you do well, and you double it! Yay!
- You now have $130,000 in the bank. You are taxed 15% for the capital gains, i.e., the $65,000 you made. You pay $9,750.
So again, to be clear, you are ONLY taxed on the additional money you made. There is no double dipping. It’s no different from getting taxed in one paycheck, and then getting taxed the next week, for a completely new paycheck. Except in this case, the second round of taxes comes at a 15% rate, which is pretty sweet, compared to the 35% you paid earlier.
So, to sum, you made a total of $165,000, and paid $44,750, for an overall rate of 27%.
Oh, and to all those still claiming this is double dipping, riddle me this: If it’s double dipping on the same income, how is it possible that the overall rate of taxation DROPS when you lump on the capital gains?
Look, there are all kinds of arguments for setting the capital gains tax at different levels. And there are all kinds of reasons to hate taxes. Nobody WANTS to pay them. But this argument being raised about double dipping? It’s a heaving pile of grade A bullshit.