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1 Gerald Prante, As Presidential Candidates Target Investment Income for Higher Taxes, Which States Stand to Lose the Most 1 (2007)

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July 16, 2007
As Presidential Candidates Target Investment Income for Higher Taxes,
Which States Stand to Lose the Most?
by Gerald Prante
Fiscal Fact No. 90
The recent Warren Buffett-Hillary Clinton forum featured the billionaire's oft-repeated
theme that the U.S. income tax code treats investment income too generously compared to
wage income. This Fiscal Fact describes the different types of investment income, how
they're taxed and which states they're most commonly earned in.
Two Types of Investment Income in the Spotlight: Capital Gains and Dividends
When people save money-whether by investing in stock directly, through a 401(k) or by
simply putting it in the bank-the earnings generated by those savings are called
investment income and taxed separately from wages.
When a person sells stock, the income is called a capital gain (or loss). If a person invests
in several companies' stock, some will probably pay a regular dividend, and those dividend
checks are also investment income.
Capital Gains: Why Has the Rate Historically Been Lower Than the Wage Tax?
If you profit from the sale of your coin collection or your house or some stock you invested
in, that's a capital gain. The federal government has almost always taxed those gains at a
lower tax rate than it has applied to wages. Why?
  The increased value of any asset is partly due to inflation, but the tax law doesn't
adjust for inflation. The lower tax rate makes up for that but in a very rough,
approximate way.
  Because people can choose when to sell their assets, capital gains are much more
sensitive to tax rates than wages. Facing higher wage taxes, people must continue
working, but in the face of higher capital gains taxes, people can cling to their
assets. This damages the economy and disappoints hopes for higher tax revenue.
  Because people invest in the stock of specific companies, and because the stock's
gain is reduced by the corporate income tax, tax experts usually add the corporate

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