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Who Will Be Affected By Increased Capital Gains?

"Do we want to keep these tax cuts for the wealthiest Americans? Or do we want to keep our investments in everything else - like education and medical research; a strong military and care for our veterans? Because if we're serious about paying down our debt, we can't do both. Tax reform should follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes…In fact, if you're earning a million dollars a year, you shouldn't get special tax subsidies or deductions."

-- State of the Union Address by President Obama January 13th 2012

In this election year, the concept of "taxing the rich" has been on the forefront of the political battlefield for sometime now. But as this concept plays out and we delve more deeply into its ramifications, we will see that this concept could have more impact on us as investors and traders than we may realize.

Can 'taxing the rich' take place without affecting us?

What is the Buffet Rule really about?

When President Obama made reference to no one making a million dollars should pay a lower tax rate than the middle class, that statement could have an impact on us, and here is why.

The Tax Foundation compiled tax earnings from 2009. Federal Income Tax paid:

  • Top 1% paid 36.7%
  • Top 5% paid 58.7%
  • Top 10% paid 70.5%

The Internal Revenue Service statistics of the top wage earners in America as of 2010 by percentage looks like this:

  • Top 1% earns $380,354.00
  • Top 5% earn $159,619.00
  • Top 10% earn $113,799.00

Let's think this through now. If President Obama states that people making more than a million dollars are year are paying less in taxes than the middle class, he has to be speaking about the top 1% wage earners. If these people pay 36.7% of all Federal Income Tax then President must be referring to the percentage of taxes they pay. In an article titles "Why Investors Pay Less Taxes than the Rest of Us," Robertson Williams we learn that the top 0.1% of wage earners make a high percentage of their income from capital gains and a low percentage from actual payroll taxes.

We have learned that the top 1% pay a large percentage of taxes. We have also learned that the top 1% make most of their income through capital gains which is taxed at a lower rate than income tax. For this reason, we may conclude that the Buffet Rule is about raising capital gains tax rate-even though President Obama did not refer to it directly.

The Percentage of Capital Gains tax rate Continues to Rise

Originally, back in 2008, the argument for raising capital gains tax rate was from 15% to20%. Jason Furman, an Obama wrote back in August of 2008 that the tax should be increased from 15% to 20% for families making more than $250,000 per year. Now in 2012 it has been proposed that anyone making over a million dollars should pay 30% of that income back to Uncle Sam.

Who will this eventually affect?

If increasing capital gains rates is the focus, how will it be possible to distinguish between all Americans who own stock and get dividends? Will it be by income? Will it be by percentage of income? One thing is for sure, if capital gains rates increase it will have a greater affect upon the middle class than the top 1% or 0.1% of income earners.

It will have an affect on every one of us that that invest or get dividends. It will affect those who are retired and rely on an investment income after decades of saving. Increasing capital gains taxes will have a much greater impact on us-the average investor than it will on the rich. It will again take away a higher percentage of our income-(proportionally) than it will the rich, so be prepared.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.