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Capital Gains Rates to Support Investing?

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January 02, 2013 – Comments (0) | RELATED TICKERS: BRK-A

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Board: Berkshire Hathaway

Author: rationalwalk

I've been doing some reading on implications of reverting back to Clinton-era tax rates and was reminded of the "super long term" capital gains rate that we used to have. It was 18% for capital gains for securities held for five years or longer.

To the extent that we have a capital gains tax at all, it has always struck me as obvious that the rate of tax should decline as the length of the holding period increases, for no other reason than to address the phantom gains created by inflation. Of course, the other good reason for lower rates on very long term gains is to encourage investors to think like owners of businesses rather than poker players.

Short-term capital gains are already taxed as ordinary income based on the argument that those who engage in short term trading are benefiting more from their active "labor" in managing their investments on a short term basis rather than as "owners" of the businesses in which they invest. This makes sense to me. I wonder if a bipartisan compromise could look something like this (at the top bracket):

* Short term gains taxed at 43.4%
* Long term gains between 1-2 years taxed at 30%
* Long term gains between 2-3 years taxed at 20%
* Long term gains between 3-5 years taxed at 15%
* Long term gains over 5 years taxed at 10%

Given the average holding period of stocks, my guess is that this would be a net revenue raiser and could possibly encourage a more healthy outlook on investing.

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