New Sources Of Revenue 3 - Capital Gains And Dividends

New Sources Of Revenue 3 - Capital Gains And  Dividends

My third source of new Social Security trust fund revenues is capital gains and dividends. I grouped them together as they often may be closely related.

Currently capital gains are differentiated by whether they are short-term capital gains or long-term capital gains. Assets held a year or less are short-term capital gains, while those held longer than a year are defined as long-term capital gains. Capital losses are deductible and used in determining net capital gains by subtracting long-term losses from long-term gains. Long-term capital gains are generally taxable at no higher rat than 15%, sometimes lower. However, short-term capital gains are subject to taxation at your ordinary tax rate which can be much higher. Here is IRS Topic 409 on this subject: http://www.irs.gov/taxtopics/tc409.html .

The Balanced, Equitable, Solvent, Tested (BEST) Social Security Modernization (Mod) Plan proposes two changes here. One is defining short-term capital gains as earnings subject to the Social Security tax. The second is extending the period that an asset must be held before it is defined as a long-term capital gain from more than one year to more than 30 months.

Remember, these people are actively, and diligently working by using capital to earn money.

These changes will affect several things. More funds will be credited to the Social Security trust funds. General tax revenues will also be increased as a result of having more capital gains being defined as short term capital gains causing them to be taxed at higher income tax rates. The shift to defining long-term capital gains to longer than 30 months may also motivate investors to consider holding on to investments for longer than a year to avoid paying both Social Security taxes and income taxes at a higher rate. This incentive may also serve to decrease financial speculation which, for example, causes commodity inflation like those documented causing higher oil prices.

Dividends are generally paid to those who invest money in corporations as a form of profit distributions. http://www.irs.gov/taxtopics/tc404.html . Dividends are categorized as either ordinary dividends or qualified dividends. Ordinary dividends are subject to income taxes at the rate of ordinary income, but qualified dividends are taxed at lower capital gain tax rates. In order to meet the requirements as qualified dividends the stock has to be held for a certain period. Perhaps the qualification requirements to meet the definition of a qualified dividend could be made more stringent and more reflective of the proposed new 30 month demarcation which would differentiate short-term and long-term capital gains.

While I am not currently proposing that dividends be redefined as earnings subject to Social Security taxes, they could be considered to be defined as wages whenever the stock is held for 30 months or less.

In recent years, there has been considerable discussion of a stock transfer tax. http://www.web.gpnys.com/?p=7538 . The BEST Social Security Mod Plan’s proposal to tax short term capital gains as wages/self employment earnings is a better idea.

What about corporate short-term capital gains or corporate earned dividends that cannot be attributed to be earned by individuals? This is a labyrinthal concept and may be difficult to clearly untangle, but certainly, corporations should be required to make at-large contributions to the Social Security trust fund if determined appropriate.

After all, to quote 2012 presidential candidate, Willard M. Romney, “Corporations are people, friend.” http://articles.washingtonpost.com/2011-08-11/politics/35270239_1_romney-supporters-mitt-romney-private-sector-experience .

Update: I want to add that earnings and Social Security trust fund contributions from short-term capital gains workers will have the added bonus effect in that workers who earn their living from capital gains may have much longer working careers than those who perform physical labor related work. Rather than the typical 40-45 year working career, capital gains workers are likely to have 60+ year working careers.

Since Social Security payments amounts are presently calculated using the highest 35 years of indexed earnings, capital gains workers have the potential to make larger overall long-term contributions to the Social Security trust fund without significantly increasing their monthly benefit amount.