The U.S. Public Forum topic for February 2018 is: “Resolved: The United States should abolish the capital gains tax.” This debate is about a complicated public policy issue. Here are three common mistakes that students make when debating about the capital gains tax.
1. The capital gains tax is not “double taxation.”
The capital gains tax is a tax on the profit realized from the sale of an asset. This profit represents new money that was not subject to the income tax. Even though both the income and capital gain are taxed, each is taxed only once.
2. This resolution does not apply exclusively to long-term capital gains.
As many debaters know, short-term capital gains are taxed at the same rate as income. Long-term capital gains (those realized after one year) are taxed at a lower, preferential rate. This resolution applies to both short-term and long-term capital gains. Two things happen when this policy is implemented. First, the tax rate on short-term capital gains is reduced to zero. Second, the preferential tax rate on long term capital gains is also reduced to zero. The result of this policy is that all capital gains are no longer subject to tax.
3. The pro side cannot propose taxing capital gains as income.
Proposing to only abolish the long-term preferential rate—and thus having all capital gains taxed at the same rate as income—might appear to satisfy the pro side’s burden. It does not. This resolution forces the pro side to defend a capital gains tax rate of zero percent. As stated, abolishing the capital gains tax means that all capital gains, both short-term and long-term, would not be subject to any tax.