This article is 7 years old. As we are in a rapidly-changing industry, the information contained in this article may no longer be relevant. Please keep this in mind while reading.

I’ve been marketing annuities since 1984 when I was hired by PaineWebber to be a financial advisor.  During the course of the past nearly three decades, the prospects for annuities often rose or fell based upon the change in marginal income taxes, dividend taxation or capital gains taxation.  Only variable annuities—with their underlying stock investment portfolio—were impacted by the relative taxation on capital gains.

Annuities have had preferential tax treatment (inside build-up to defer current income taxes until income withdrawal) since the inception of the U.S. Federal Income tax in 1913.    However, going back further, these guaranteed lifetime income products were available to Presbyterian ministers in the 18th century.

Simultaneous to the protection of the right of income tax deferral under the new IRS code in 1913 was the institution of a tax on capital gains.

With the exception of the estate tax the capital gains tax may be the most controversial mechanism to raise revenue. And like the estate tax, the capital gains debate can be boiled down in moral and economic terms. defines a capital gains tax as, “ The tax levied on profits from the sale of capital assets. A long-term capital gain, which is achieved once an asset is held for at least 12 months, is taxed at a maximum rate of 15 percent or 5 percent, depending on a taxpayer’s income. Assets held for less than 12 months are currently taxed at regular income tax levels, which are considerably higher.” Capital gains taxes are applicable to all Americans except those at the bottom 15% of the American tax bracket.

In terms of a socio-economic perspective, the wealthy receive substantially large amounts of capital gains in terms of their overall income. Earlier I addressed how the stock market has expanded to include all segments of American society. However the fact is that people who make more are more likely to own stocks than people of more modest means.


This bar graph by the Internal Revenue Service highlights this fact. When thinking about political policy in terms of taxes its important not to alienate the middle class. The income of people making less than $200,000 a year that comes from capital gains in negligible.



History of Tax Changes:

Between 1913 and 1921 the amount of revenue that could be taxed from capital gains was maxed out at 7%. During this time period the United States was experiencing unprecedented growth both economically and geo- politically, this expansion would eventually give way to the roaring twenties. However the aftermath of World War II necessitated that American tax policy be radically reevaluated. Since then the relative rates of capital gains taxes have fluctuated several times.


Most recently, under the administration of President George W. Bush capital gains taxes experienced a substantial overhaul. Kathy Krawczyk and Lorraine Wright of The CPA Journal elaborates, “The 2003 Tax Act’s provisions lowered the rates on long-term capital gains to 15% for taxpayers in the 25% bracket or higher and lowered the 10% rate to 5% for individuals in the 10% and 15% tax brackets, effective May 6, 2003, through December 31, 2008. This provision eliminated the five-year holding period rates of 18% and 8%. In 2008, the new 15% rate remains the same but the 5% rate drops to 0%.  In 2009, the capital gain rates will return to the old 20% and 10% rates, and the five-year holding period rules and rates return.”

President Barak Obama vowed that he would keep capital gains taxes low for small businesses and middle class individuals, but in terms of the wealthier segments of the population he would reintroduce Clinton’s tax policies. Tom Herman of the Wall Street Journal writes,

“If Congress takes no action, the top rate on long-term capital gains will remain 15% in 2010, but will automatically rise to 20% in 2011. The top rate on dividends is scheduled to rise to 39.6% in 2011. President Obama has proposed significant tax-law changes, starting in 2011. For example, he would keep tax rates on long-term capital gains and most dividends where they are now for most taxpayers, but he would create a new 20% rate for many upper-income taxpayers.”

As former President Bush’s tax cuts began to sunset, there is an expectation that previous tax precedents are going to be radically redefined.

Part 2 of my blog will be posted on Wednesday