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Capital gains (at least as currently taxed) are extremely sensitive to tax rate because the taxpayer can choose to sell or not sell (ie it isn’t like income). So if you have a higher capital gains tax you likely will have less gains because taxpayers obtain a better ROI leaving their pre tax investment in asset X instead of their post tax investment in asset Y.
As a practical matter, a lower CGT is one where lower taxes might actually be revenue raising.
That just kicks the can down the road a bit. They eventually sell if they want to get access to the money to do other stuff with it.
The lock in effect is studied and is real. Again, the higher the capital gains rate the higher ROI to stay invested in the same asset.
Think of it this way. You invest 100 dollars in Apple stock. It appreciates to 150. You could sell and pay 10 of tax on the gain leaving you with 140 to invest. Or you could keep 150 exposed to Apple. Provided the return on that 10 outstrips the ROI on the 140 invested in non Apple stock, I keep my money in the Apple stock.
Also there are strategies to monetize without triggering gain (eg leverage, death).
I don't deny the lock in effect is real and present to some degree, but it's not a way to avoid taxes, only to delay them a bit. Owning stocks is not an end unto itself for most people, they're a vehicle to get returns, either through dividends or appreciation. So yes, they can own the Apple stock for longer, but eventually they'll sell which triggers the full effect of the tax.
The death loophole is bad and should definitely be closed. I'm not sure how leverage could be used to avoid taxes, but it should probably be closed as well.
The less frequently you sell your assets, the lower the effective tax rate due to capital gains tax. Also, if it's something that generates a return other than through appreciation (e.g. a dividend paying stock or real estate), by holding to it longer, you realize more of the value in a form that doesn't count as a capital gain and so you pay less tax.
No, that's not how it works. Capgains are taxed based on a percentage of the appreciation. It's not like a financial transactions tax that is a flat fee every time a trade is made. A 20% gain will be subject to the same tax as 2 equivalent 10% gains would be.
Dividends are taxed at either the personal income tax rate, or the capgains rate if they're qualified dividends.
Yes, but if you have to pay tax on the first 10%, you won't get another 10% gain. Let's say you have a $1,000 investment that grows at 10% per year and the capital gains tax is 25%. If you sell after two years, you'll have gained $210 and pay $52.50 in tax, leaving you with $1,157.50.
If instead you sold and rebought after one year, then you'd have a gain of $100 that year, leaving you with $1,075 after tax. That would give you another gain of $107.50 after the next year, in which you'd pay $26.88 after tax, leaving you with $1,155.62.
It could be in a tax sheltered account though.
Yes, the key part of your two examples being that the guy who stayed in the market the entire time payed slightly more tax at $52.50 vs $51.88 that the guy who rebought after a year, due to the slightly higher principle. In other words, they delayed the tax, but they did not dodge the tax.
So maybe my point up above about being "subject to the same tax" was a bit misleading, and I should have clarified that they pay at the same rate, adjusted for principle. The guy who stays in for two years pays 25% of his gains on his two years, vs the guy who rebalances after one year pays 25% for one year, then 25% for the second year. The important point here is they're not avoiding the tax forever, they're delaying it.
Not sure what you're referencing here other than qualified dividends.
You do avoid some of it though by delaying it. The rate is effectively higher. The original investment was the same in both cases. There was no rebalancing.
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