Investing has many appeals. Building multiple income streams, increasing your net worth, and obtaining financial freedom are just some of the benefits that can occur should you invest in something (whether that “something” is the stock market, real estate, or some other kind of investment in a venture or enterprise). However, another advantage of investing that is often overlooked is that gains on your investment are taxed at a lower percent than are ordinary income. Thus, the tax laws are encouraging investing.

A capital gain is defined as a profit that results from the sale or exchange of an investment over its purchase price. Therefore, should you buy a stock for $1 per share and sell it for $5 per share, you will have a capital gain of $4 per share. Even though you have earned this money and it qualifies as income, you are not taxed on this capital gain at the same rate as your ordinary income. Thus, by investing your money and by making money on your investments, you save money.

However, because the tax law is not set in stone and because it changes with every new president that is elected, there may be a chance that the capital gains tax is increased. Therefore, the question becomes whether this increase in capital gains taxes will discourage investment and inhibit economic growth. Even if the capital gains tax increases, as long as it stays below the tax rate for ordinary income, an increase will not discourage investment to the point that it inhibits economic growth.

Speaking from a purely economic sense, if the tax for capital gains is less than the tax for ordinary income, (regardless of the extent of the increase) investment will not be discouraged because you still get to keep more of your money should you make it through investing as opposed to the money that you make from your job. Additionally, because of the potential benefits of investing set out above, even if the capital gains tax was the same as the tax on ordinary income, people would still invest.

Although there may be a little fallout from such an increase, it will not be big enough to cause any kind of significant impact on the economy. This is true because even though investors will be paying more tax dollars, they still get the advantage of making more money and becoming financially secure through investing. As such, the appeal of investment profits will not go away merely because of an increase of a particular tax.

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