Capital Gains, the Myth

The presumed purpose for preferential tax treatment for investment income is the myth that these investments benefit the economy, generate more income, and create jobs. Because this activity is presumed to take place the results will be greater tax revenues that would more than offset the decrease from the preferential tax treatment. Unfortunately there is no evidence to support this assertion. In reality, most of the activity that produces capital gains is not even investment but trading. When an individual buys stock in AT&T, for example, that individual is not investing any money in AT&T. That individual is purchasing stock that some other individual (or business) decided to sell. The seller may or may not have sold those shares of AT&T at a profit, but there was nothing that transpired in that transaction that would improve the economy, generate more income, or create jobs. In reality, that transaction actually removed money from the economy. Unlike the purchase of an article of clothing, for instance, the purchase of stock, whether for immediate or long term gain is not deserving of lower tax treatment. This myth has been propagated by those individuals who would most benefit from paying less in taxes and who have the political clout to benefit at the expense of those without political clout. When an individual purchases an article of clothing, the seller must then replace that inventory. The purchase generates favorable economic activity as does the replacement of inventory. That is not the case when a share of stock is sold. Sales of stock is nothing more than an exchange of ownership. (Perhaps that is why is is called a trade and takes place under the auspices of an exchange!) Whether the stock is held by an individual for a day, week, or a year does not affect the economic contribution of a transaction, yet stock held for one year is treated differently than stock held only for a day. There is but one reason for special tax treatment for stock sales, the people who make their living from buying and selling stock have more political clout than either the people who earn income from their labor or the people who make their living from buying and selling merchandise. This inequity needs to change.