The main argument against cutting the capital gains tax has always been that it primarily benefits the wealthy. For example, a recent study by Citizens for Tax Justice calculates that two-thirds of the benefits of a lower capital gains tax would accrue to the top one percent of taxpayers. However, a new study from the Congressional Budget Office shows that the benefits of reducing the capital gains tax and indexing capital gains for inflation would mainly benefit the middle class and the elderly.

Entitled, "Perspectives on the Ownership of Capital Assets and the Realization of Capital Gains," the CBO paper presents voluminous data on those who realize capital gains, what assets they own, their ages, and the taxes they pay. Among the findings:

• About half of all families own assets such as stock, bonds, real estate and businesses that generate capital gains. These assets account for about 38 percent of family wealth.

• Over a 10-year period, about one-third of taxpayers reported capital gains or losses.

• Although about 75 percent of total capital gains in dollar terms are realized by those earning more than $100,000, two-thirds of those people with capital gains made less than $50,000.

• The amount of gains realized by the wealthy are inflated by those with one-time gains, such as the sale of a family farm or business.

• The elderly realize a disproportionate amount of capital gains. In 1993, those over age 65 realized 30 percent of all capital gains, although they make up just 12 percent of the population. They also paid 18 percent of all capital gains taxes.

However, the most remarkable data in the CBO study relates to the effect of inflation on capital gains. It indicates that in 1993 every income class except those with incomes above $200,000 suffered real losses on their sales of capital assets (see figure). That is, the prices they sold their assets for had not increased as much as the inflation rate. Yet billions of dollars in taxes still had to be paid on the nominal gains.

For example, if I buy an asset for $100 and sell it for $150 I have realized a nominal gain of $50. But if inflation increased by 75 percent between the time I bought the asset and the time I sold it, I actually suffered a loss of $25. I would have needed to sell the asset for $175 just to break even. Nevertheless, I must still pay taxes on the $50 "gain."

The new CBO study provides strong evidence that cutting the capital gains tax or indexing capital gains for inflation does not just benefit the wealthy.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 9, 1997.