Why the Capital Gains Tax Rate Should Be Zero

Studies | Taxes

No. 245
Friday, August 31, 2001
by Bruce Bartlett


Conclusion

In conclusion, there is a long line of analysis and court cases to the effect that capital gains are not income. And the main argument for taxing gains from a theoretical point of view, Haig-Simons, is deeply flawed. Yet accepting Haig-Simons would at least require full adjustment of gains for inflation, which would virtually wipe out all taxable gains in the aggregate.

"Capital gains are not income, but accepting the main argument for taxing them would require fully adjusting for inflation, which would wipe them out."

While there are many people who argue for a capital gains preference, and even support lowering the tax rate to zero, few have grounded their case on the fundamental principle that capital gains are not income.55 They should make this argument consistently because it raises the case from the realm of political expediency or even economic efficiency, to the level of principle. Doing so at least gives advocates of lower capital gains a firmer foundation when confronted by those making a principled argument for not doing do, on the grounds that capital gains should really be taxed like ordinary income.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.


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