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Warren Bostrom, Accounting & Finance


Recently, there has been controversy surrounding the capital gains tax. During his state of the union address, President Obama mentioned the case of Debbie Bosanek as a clear indication that the tax is unfair. Debbie is the secretary of Warren Buffet, and happens to pay fewer taxes than her boss. The primary reason for this is through capital gains. The tax rate on long-term capital gains (assets that have been held for over a year), is less than the tax on regular income, with most people paying about 15% on gains (the highest earners now pay 20%).

Legislature on and rationale for the tax rate is one that tends to be a hot political topic. On one side, the belief is that the tax disproportionately favors the rich. In 2010, the top 20% realized more than 90% of all capital gains. The 0.1% (richest) made about 47% of the capital gains realizations (5). On the other hand, there are fears that higher taxes may have negative economic consequences. This could include a decrease in investment, as well as the incentive to hold onto low-performing assets. The claim that tax rate has an effect on investment is one that must be tested to objectively address the issue. Therefore, I will attempt to answer if the tax on long-term capital gains affects investment behaviors in an economy. If such a relationship exists, it could be useful for future tax legislature.

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