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LTE: A little clarification on capital gains

May 27, 2011 — The Asbury Park Press   Bookmark and Share

In the May 20 Asbury Park Press, your featured letter writer took issue with the tax treatment of capital gains, “Low capital gains tax rate for wealthy must be raised.’’ He specifically said that someone could start a limited liability corporation, pay himself a meager salary and take the rest of the income as a capital gain, taxed at a 15 percent rate.

By definition, a capital gain results from the sale of property held for investment longer than one year. Wages are not capital gains, bonuses are not capital gains, inventory sale is not a capital gain when sold, dividends are not capital gains.

If I owned a wooded lot longer than a year and then sold it, the difference between what I paid for it and what it sold for is a capital gain/loss, depending on if it was profitable or not.

The idea of special tax treatment of capital gains is to encourage growth of commerce by taking greater risk. If Treasury bills pay 3 percent interest and are taxed at 30 percent, that investors gain on the most-sold paper in the world is 2.1 percent interest after taxes.

The government wants to encourage people to buy riskier stocks, because that is a source of capital that enables small business to become large businesses and employ more citizens. And for that, they offer cheaper taxes.

The letter writer’s whole argument is really a rant, as he has just opinion, no facts.

Tom Cleary