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US Federal
Oregon State-Measure 66
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Capital gains are taxed at preferential rates. While 2007 marginal tax rates on
other income, like wages, go as high as 35%, the max marginal rate on capital
gains is 15%, as long as the asset was held at least 1 year.
This preferential treatment is not particularly in line with the H-S criterion.
Capital losses can offset capital gains. This offset is consistent with the H-S
criterion.
Other ways the tax treatment of capital gains departs from the H-S criterion:
Only realized gains are taxed. Taxes are not paid on the appreciation of an
asset until the asset is sold. This may seem like a minor issue, but actually its a
biggie in terms of the taxes it allows long-term investors to avoid.
If Anne purchases an asset for $100,000 and it increases in value at 12% a year,
-- after 1 year its worth
If Anne purchased the same $100,000 asset with the same 12% rate of
return, but the gains were taxable as they occurred whether or not they
were realized,
-- after 1 year and the 1st years tax its worth
$100,000 (1 .12) ($12,000.20) $112,000 $2400 $109,600.
-- after 2 years and the 1st & 2nd years taxes, its worth
$100,000 (1 .096)2 $120,122.
Anne in this case realizes only a $20,122.
The difference here seems small, but compounded annually over many
years the difference in after-tax returns to investors can be very large.
Over 20 years at 12% with an initial investment of $100,000 the difference
is more than $150,000.
For the above reasons, a tax accountants mantra is taxes deferred are
taxes saved.
Do all of these deducations meet the H-S criterion? Business expenses? Home
loan interest? Charitable giving?
Deductions and complexity Each allowable itemized deduction presents a cost
to the IRS and to taxpayers, as it increases the complexity of the tax code.
Itemized deduction and phaseout Itemized deductions are reduced by 2% of the
amount by which AGI exceeds $150,500, up to a max of 80% of deductions.
Clearly this makes itemized deductions less regressive.
Tax expenditures: Failure to include some item in the tax base results in a
loss of revenue to the US Treasury. For example, TANF is a government
expenditure program in which government pays cash to needy families. The
EITC is a tax program in which some portion of the work income of lowearning families is excluded from taxation. The EITC, therefore, is a tax
expenditure.
The Congressional Budget Office is required to compile a tax expenditure
budget annually, to make clear to legislators and voters how much the
government expends on its citizens in the form of tax breaks.
ii.
Oregon