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

Studies | Taxes

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


Introduction

Over the past two decades, no single economic issue has caused more controversy than the capital gains tax. Ever since the capital gains tax rate was raised from 20 percent to 28 percent as part of the 1986 Tax Reform Act, Republicans and many centrist Democrats tried repeatedly to enact a capital gains tax cut to stimulate job creation and economic growth.  [See the sidebar, “What Is a Capital Gain?”]  For 10 years, those efforts were stymied by the criticism that the tax cut would be a “giveaway to the rich.”

In 1997 the political logjam was finally broken.  The dramatic results proved the critics of the capital gains cut wrong; investment, new business creation, economic growth and job creation soared to record levels, and the United States enjoyed historic prosperity.  Federal receipts from the capital gains tax cut of 1997 increased by 75 percent after four years.

“Some presidential candidates want to nearly double the tax on capital gains.”

Capital gains receipts fell during the economic slowdown beginning in 2001.  Then, in 2003, the Bush administration argued for an investment stimulus package.  As part of the tax bill that was signed into law in May 2003, the capital gains tax was lowered from 20 percent to 15 percent.

The issue of capital gains taxes is again in the spotlight as Democrats in Congress and in the presidential campaign call for raising the rate back to 20 percent, with some presidential candidates, such as John Edwards and Barack Obama, endorsing a return to the 28 percent rate.  If Congress does not act to extend the Bush tax cuts, the tax law will automatically revert to the 2001 law and the capital gains rate will climb back to 20 percent.

This study examines the effects of the 2003 capital gains tax reduction.  After four years, the tax cut has had universally beneficial effects, and it would be a policy mistake to raise the tax rate to 20 percent or higher. Making the Bush tax cuts permanent now would:

  • Increase stock values.
  • Increase the rates of capital formation, economic growth, job creation and real wages over the next five to 10 years.
  • Lead to very minimal (if any) long-term revenue losses for the government.
  • Help entrepreneurs raise money for new ventures and products.
  • Promote a more efficient flow of capital in the financial markets by reducing the lock-in effect of the capital gains tax.

Read Article as PDF