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

Recent Trends in Capital Gains Tax Rates and Receipts

In 1997 President Bill Clinton and a Republican Congress reached an agreement to lower the capital gains tax from 28 percent to 20 percent.  According to Congressional Budget Office tax collection data, in 1996, the year before the capital gains tax rate cut, the total amount of net capital gains on assets sold was $335 billion.  A year later, capital gains had jumped to $459 billion.  (The tax cut was retroactive to May 1997.)  In 1998 they climbed to $562 billion.  In 1999, total capital gains exceeded $669 billion.  A similar process occurred with the 2003 reduction; in 2002, realizations were at $301 billion; by 2006, they reached $683 billion.6

“More assets were sold, and federal revenues soared, after the 1997 and 2003 tax cuts.”

Of course, a big part of this surge in realized capital gains was a result of the stock market gains in the late 1990s and then in the 2003-2006 period.  When the stock market high-technology bubble burst in 2000, capital gains realizations and revenues declined sharply.  But the capital gains tax means that the after-tax rate of return on stocks rises, so the value of the stock market is inversely affected by the rate of taxation on capital gains.  The two events, a higher stock market and the lowering of the capital gains tax, are not independent phenomena.

The CBO data also indicate that capital gains revenues have exploded. In 1996, the last year with the 28 percent rate, the government collected $85 billion in capital gains receipts.  Table III shows what has happened since.

It is clear from these data that the lower tax rates changed people’s behavior, stimulated economic growth and thus created more, not less, tax revenues.  This was neither a temporary, one-year effect, nor a historical aberration.

After the 1981 capital gains cut from 28 percent to 20 percent, capital gains revenues leapt from $30 billion in 1980 to $38 billion by 1983 — a 27 percent increase.  More importantly, slashing the income and capital gains tax rates in 1981 helped launch what we now appreciate as the greatest and longest period of wealth creation in world history.  In 1981 the stock market cratered at about 1,000, compared to 13,500 today.

Conversely, the perverse action in 1986 of raising the capital gains tax rate caused total asset sales of taxable capital gains to evaporate from $603 billion in 1986 to $283 billion in 1989.

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