The Capital Gains Tax Rate

The capital gains tax rate in the United States has been a political football for more than thirty years. This in spite of the fact that most people don't know what the capital gains tax rate should be, what it is set at now, or even what it is.

According to wikipedia, the capital gains tax is the following:

In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income. Capital gains are generally taxed at a preferential rate in comparison to ordinary income. This is intended to provide incentives for investors to make capital investments and to fund entrepreneurial activity. The amount an investor is taxed depends on both his or her tax bracket, and the amount of time the investment was held before being sold. Short-term capital gains are taxed at the investor's ordinary income tax rate, and are defined as investments held for a year or less before being sold. Long-term capital gains, which apply to assets held for more than one year, are taxed at a lower rate than short-term gains.

So basically, "capital gains" is the money you make from your investments. The two types of capital gains are short-term, which gets taxed at a regular rate (say, 30% depending on your income and location), and long-term, which gets taxed at a much lower rate.

In 2003 President Bush and the republican congress lowered the capital gains tax rate on long-term investments to just five percent. That means if you're already super-rich, and owned a large amount of stock in the likes of oil companies, private military contractors, or construction companies - all industries that profitted mightily from Operation Iraqi Freedom - then you stood to see your earnings increase while the taxes you paid decreased.

If it seems counter-intuitive, that's because it is. Economists around the world decried the capital gains tax rate adjustments of the time, and our current economy has reaped what was sown in that not-so distant past.

Thankfully, the rates weren't made permanent, though they were extended until 2010. They'll come up for renewal in a largely democratic congress and, of course, with a popular democratic president who's already vowed to let the rate adjustment expire.

In contrast, the capital gains tax rate under Ronald Reagan was twenty percent. Seems a long, long time ago now, but the thing that's remained the same is the use of capital gains tax rate adjustments to mobilize the base in one direction or another.

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