Reply #48: But the deduction have NOT changed that much, so the top rate is important [View All]

Now, the big difference is how we treat short term (Investments held less then Five Years) and long Term (Investments held more then five years). Prior to Reagan, long term capital gain was subject a a 50% disregard, i.e. if you made a Million Dollars from an investment you held for 5 years, you only paid taxes on 1/2 of it or 1/2 Million Dollars. i.e, you paid 90% taxes on HALF of what you earned (Net effect was a 45 % tax rate). The top rate wad aimed at people who earned they money from Investments and the Stock market NOT people who worked for wages or Salary. Given that fact, the 50 % disregard encouraged long term investments i.e. you could take home twice as much IF the profit was from something you held five years as oppose to what you earned THIS YEAR.

The High Tax rate had several positive effectives, things like manipulating the Stock Market did not happened, the main reason being any such manipulation was short term gain and taxed as 90% NOT 45 %. Thus people avoided such gains prior to Reagan for they made more money investing and holding on to the investment NOT selling and buying stocks and bonds.

Reagan Changed this reduced both long term and short term capital gains to the same low 32% rate. The rationale was inflation but the real effect was to make long term investments (Buildings, factories etc) having the same return as someone who bet a stock would go up or down (Under the old rule, the former if held five years taxed at 1/2 the rate of the later).

When I was in Collage in the Late 1970s early 1980s, my finance books were all saying that a good financial leader was someone who was looking not just five years down the road but 20-30 years down the road. Today we have returned to what it was BEFORE the above high tax rate, long term is anything held for one year or longer (And no one thinks in terms of more then one year) and short term is emphasized and it is everything that shows a profit within one year.

Just pointing out the problem is the main deduction encouraged long term thinking, but that was abolished in 1982 under Reagan, and we are reaping what was sowed under Reagan when he eliminated long term capital gains.