The Bush Capital Gains Tax Cut after Four Years: More Growth, More Investment, More Revenues

Policy Reports | Taxes

No. 307
Thursday, January 10, 2008
by Stephen Moore and Tyler Grimm


  1. Jude Wanniski, “Capital Gains in a Supply Side Model,” testimony before the Senate Finance Committee, March 15, 1995.
  2. Alan S. Blinder, “The Level and Distribution of Economic Well-Being,” in Martin Feldman, ed., The American Economy in Transition (Chicago: University of Chicago Press, 1980), page 48.
  3. Congressional Budget Office, “Indexing Capital Gains,” August 1990.
  4. Victor Canto and Harvey Hirschorn, “In Search of a Free Lunch,” Laffer and Canto Associates, San Diego, Calif., November 1994.
  5. See, for example, Norman B. Ture and B. Kenneth Sanden, The Effects of Tax Policy on Capital Formation (New York: Financial Executives Research Foundation, 1977); Wanniski, “Capital Gains in a Supply Side Model;” and Raymond Keating, “Eliminating Capital Gains Taxes: Lifeblood for an Entrepreneurial Economy,” Small Business Survival Committee, Washington, D.C., 1995.
  6. Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2008-2017,” January 2007. Available at
  7. Figures adjusted for inflation to constant 2006 dollars.
  8. Mark Bloomfield, American Council for Capital Formation, testimony before the Senate Committee on Finance, February 15, 1995.
  9. The research was conducted by economists Patrick Hendershott and Yunhi Won of Ohio State University with Eric Toder of the Treasury of New Zealand.  The researchers employed a modified version of the General Equilibrium Model of Differential Asset Taxation, which attempts to capture the effect on various types of capital investment of changes in the tax treatment of various assets and differences in marginal tax rates among taxpayers. The General Equilibrium Model of Differential Asset Taxation is a sophisticated simulation computer model of the economy.  It incorporates four major capital-using sectors:  corporations, noncorporate businesses, state and local governments, and 147 separate household sectors.  The particular assets held by those sectors are sensitive to the after-tax yields on investments, the riskiness of the assets and a measure of risk aversion.  The model also contains a detailed representation of the major elements of personal and corporate tax laws, thus allowing the researchers to measure how capital is allocated in response to various changes in the tax code — in this case, a reduction in capital gains taxes.
  10. Hendershott, Won and Toder, “Economic Efficiency and the Tax Treatment of Capital Gains,” National Chamber Foundation, Washington, D.C., 1990.
  11. A study by economist James Poterba finds that “a 1 percent change in the marginal tax rate leads to a 1 percent change in reported income, so even without any change in the true tax base, capital gains tax cuts would be essentially self-financing.”  James M. Poterba, “Tax Evasion and Capital Gains Taxation,” American Economic Review, May 1987.
  12. On the effect of the 1969 rate increase, see Gerald Auten, “Empirical Evidence on Capital Gains Taxes and Revenues,” U.S. Department of the Treasury, 1979; and Gary Brannon, “The Lock-in Problem for Capital Gains: An Analysis of the 1970-71 Experience,” in The Effect of Tax Deductibility on the Level of Charitable Contributions and Variations on the Theme (Washington, D.C.: Fund for Policy Research, 1974).
    On the effects of the 1978 and 1981 rate reductions, see Michael R. Darby, Robert Gillingham and John S. Greenlees, “The Direct Revenue Effects of Capital Gains Taxation: A Reconsideration of the Time-Series Evidence,” Treasury Bulletin, June 1988.
    On the 1986 rate hike, see Lawrence B. Lindsey, “Capital Gains Taxes under the Tax Reform Act of 1986: Revenue Estimates under Various Assumptions,” National Bureau of Economic Research, Working Paper No. 2215, April 1987.
    On the 1997 rate cut, see Stephen Moore, “Capital Gains Tax Cuts Aren’t Just for the Rich,” Wall Street Journal, July 15, 1999.
  13. Joseph J. Minarik, “The New Treasury Capital Gains Study: What Is in the Black Box?” Tax Notes, June 28, 1988.
  14. House Policy Committee, “2000 Annual Report to Taxpayers.”  Available at
  15. Office of Tax Analysis, Department of the Treasury. February 9, 2007; *Years 2005-2006 are estimates from the Congressional Budget Office’s FY2008 Budget and Economic Outlook.
  16. See Martin Feldstein, Joel Slemrod and Shlomo Yitzhaki, “The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains,” Quarterly Journal of Economics, June 1980.
  17. Congressional Budget Office, “How Capital Gains Tax Rates Affect Revenues: The Historical Evidence,” 1988, page xi.
  18. Canto and Hirschorn, “In Search of a Free Lunch.”
  19. Canto and Hirschorn estimate that the economic impact of the current investment lock-in is to raise the cost of new capital by 1.64 percent per year. They calculate that “unlocking the capital gains could increase household income between $115 [billion] and $230 billion per year” (page 6). That’s an increase in per-household income of $1,000 to $2,000.
  20. Alan Reynolds, “Time to Cut the Capital Gains Tax,” Supply Side Analytics, Polyconomics Inc., 1989.
  21. Quoted by American Council for Capital Formation.
  22. Internal Revenue Service, “Satistics of Income,” 2007, Table 1.4.
  23. Joseph J. Minarik, “Capital Gains,” in Henry J. Aaron and Joseph A. Pechman, eds., How Taxes Affect Economic Behavior (Washington, D.C.: Brookings Institution, 1981).
  24. Bloomfield, testimony of March 28, 1990.
  25. Ibid.
  26. John Goodman, Aldona Robbins and Gary Robbins, “Elderly Taxpayers and the Capital Gains Tax Debate,” National Center for Policy Analysis, 1990.
  27. Arthur Page Hall, “Issues in the Indexation of Capital Gains,” Tax Foundation, Special Report, April 1995.
  28. Curtis Dubay, “Issues in the Indexation of Capital Gains,” Tax Foundation, Special Report No. 148, November 2006. Available at
  29. Wayne Angell, Governor, Federal Reserve Board, Statement before the Republican members of the Joint Economic Committee, June 22, 1993.
  30. Ibid.
  31. Office of Tax Analysis, The United States Department of the Treasury. A Dynamic Analysis of Permanent Extension of the President’s Tax Relief, July 25, 2006, page i.  Available at
  32. “A Capital Gains Primer,” Wall Street Journal, October 17, 2007; page A22.  Available at

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