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A Capital Gains Tax is a tax levied on the income derived from the sale of an investment. High capital gains tax rates lower the return on investment, thus increasing the cost of capital and depressing overall investment in the economy.

Why does it need to be reduced?

A capital gains tax reduction would:
  • Lower the overall cost of capital and stimulate investment in the business and the economy
  • Substantially raise tax collections and increase tax payments by the rich and produce more tax revenue for the government. This is a proven fact, based on history. When capital gains tax rates were lowered in 1978 and in 1981, government tax revenue climbed steadily. Conversely, in 1986, when the tax rate increased, the revenue began declining.
  • Increase the rate of capital formation, economic growth, job creation, and an increase in investment, output and real wages.
  • Unlock hundreds of billions of dollars of unrealized capital gains, thus promoting more efficient allocation of capital. Since the tax is paid only when an asset is sold, taxpayers can legally avoid payment by holding on to their assets – a phenomenon known as the “lock-in effect”
  • Divert investment funds to new business start-ups, which is particularly vital to the economy because studies indicate that small businesses (20 employees or fewer) create anywhere from 50 to 80 percent of all new jobs in the United States.
  • When capital gains tax rates are lowered, the value of existing assets necessarily increases. Tax revenue rises as owners pay taxes on the higher value of their assets when realized.

    Should we abolish the tax?

    Completely abolishing the capital gains tax would:
  • Promote entrepreneurship, which is a vital part of our economic strength.
  • Increase the competitiveness of publicly-held firms seeking to increase capital gains for the overall benefit to shareholders.
  • Increase wages for American workers, especially the most economically disadvantaged.

    The diagram above, produced in a 1997 U.S. House of Representatives Joint Economic Committee session, shows the long-term potential for revenue collection by capital gains tax adjustments.

    History is on our side

    Patterns observed throughout history would be the single most strongest support for a Capital Gains Tax cut.
  • In 1978, when the capital gains tax was reduced from 49 percent to 28 percent, “the number of black-owned businesses increased in a five-year period by one-third.” After the tax rate was cut again, down to 20 percent, the number rose by an additional 38 percent.
  • In the 1980’s, after the marginal income tax rates were reduced by more than one-third, the United States attracted a net of nearly one-half trillion dollars of foreign capital
  • When the capital gains tax rate was lowered in 1981, the unemployment rate fell by nearly 3 percentage points by 1986
  • During the 1986 Tax Reform Act, when capital gains tax rate was raised from 20 to 28 percent - a 40 percent increase - Between 1986 and 1992 business fixed investment fell by half, and business investment in equipment fell by one-third.

    The stark realities of the existing tax

  • Capital Gains Tax brings in little revenue for the federal government. Capital Gains Taxes are just 6 percent of personal and corporate income tax receipts and just 3 percent of total federal revenue. Even if the tax was abolished entirely, and there were no offsetting receipts, the federal government would still collect 97 percent of its total tax receipts each year. Is that really worth keeping a stronghold over a potential for strong economic growth, especially in this economic downturn?
  • Capital Gains are not indexed for inflation. This means that people might pay capital gains taxes on capital losses because the seller pays tax not only on the real gain in purchasing power but also on the illusory gain attributable to inflation. Double taxation also occurs because the owners are taxed when they sell shares of their stock and when the company actually earns the income.

    But not everyone wants to see that potential realized

    They say that:
  • There was a reduction in trading in anticipation of changes in the tax rate, as was witnessed in 1986.
    However, the real issue at hand is a stimulus of overall trading once the rate goes into effect. This is where the real potential will be unleashed.
  • There will be a paper shifting of reported income from ordinary sources - such as wages taxed at the “normal” rate – to capital gains income with lower rates.
    Corporations may try to do that, but Federal regulatory authorities are in place, especially after recent events, to make sure that they do not take advantage of any such circumstances. This is intended to benefit the balance sheets of shareholders, not just CEO's.
  • The macroeconomics effects of a capital gains tax reduction would be minimal unless the saving rate increases to provide additional resources for investment. It is argued that the saving rate is unlikely to increase as a consequence of a capital gains tax reduction since empirical studies have found only a weak relationship between saving rates and rates of return.
    There is more to macroeconomic cause-and-effect that saving to ensure a successful economic catalyst. It is more important that investors choose the right asset allocation to ensure they receive maximum rates of return and with the tax cut, they will be to enjoy that realized gain and not only re-invest it into the markets, but form an increase in consumer spending. warming up the macroeconomic climate.

    What Has Happened
    As a result of excellent fiscal policy, the top tax rate on net capital was dropped from 20% to 15%, and likewise for tax brackets of 15%, the new rate is 10%, and for 10%, the new rate is 5%.

    The Next Step
    A simple 5% in the top tax rate is not enough for the American economy to feel the full effect of the Capital Gains tax cut. It is important for you to contact your Senator and Representative to express how you feel about eliminating the Capital Gains tax at a personal level, altogether. As an investor, you are contributing to economic stimulation, and the tax only serves to hinder that.

    Works Consulted:
    Saxton, Jim. “The Economic Effects of Capital Gains Taxation.” Joint Economic Committee Study, June 1997. [ grwth/capgain/capgain.htm]

    Moore, Stephen and Silvia, John. “The ABCs of the Capital Gains Tax.” Policy Analysis, October 1995. []

    Wellesley, Donald. "Taxing Corporate Capital Gains". Editorial, April 2004. [] 1