Federal Income Tax and Capital Gains - How Do They Fit Together
?
December 8, 2004
By Srinidhi Goenka
The total federal income tax collections appear
to have risen over the past few years. Correspondingly,
the average tax burden on the people has also seen
a rise. Economists say that this rise can be attributed
to the relationship between federal income tax and
capital gains. This is because the capital gains income
of the high-end taxpayers has also increased substantially.
Average Tax Not Representative Of the Economy
According to the experts, the common assumption that the average
tax is representative of the tax paid by the middle income person
does not hold true. They say that the federal tax as a percentage
of GDP which is used to calculate the average tax does not really
depict the actual situation of the economy. The middle income people
pay less than the average tax rate. They also say that this is due
to the federal income tax being proportional to capital gain.
The reasoning behind such a statement is that the manner in which
the federal tax rate is structured, the higher the income, the more
the tax is payable by you. As most middle-income families fall within
the 15% tax slab, higher taxes are paid by the wealthier. So, the
average tax rate does not truly represent the common man.
Now, the question arises that how the relationship between federal
tax and capital gains affects this scenario. There are two reasons
which can explain this :
1. Almost 75% of the capital gains are realized by high-income
taxpayers with incomes higher than $100,000.
2. Also, the tax receipts as a percentage of GDP has seen a rise
due to high capital gains in the past few years. These gains were
made by high income families as well.
Thus, we can see that both these factors do not affect the middle
income classes in a concrete manner. So, to assume that the average
federal tax rate is representative of the whole economy does not
hold true as the capital gains plays an important role in it as
well.
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