NCPA - National Center for Policy Analysis

Forbes Is Right On Capital Gains

November 29, 1999

Some of the dirtiest fighting among the Republican Party's presidential contenders is among those currently bringing up the rear. In recent weeks, Gary Bauer has attacked Steve Forbes' flat tax proposal as "a huge windfall to business and a setback to working Americans." He went on to excoriate Forbes for wanting to exempt capital gains from taxation, calling it a "mega-loophole for Wall Street."

The purpose of not taxing capital gains under the flat tax is to eliminate the current triple taxation of corporate income.

  • Corporate income is taxed first when businesses pay the corporate income tax, which goes up to 35 percent.
  • The same income is taxed again when paid out to shareholders in the form of dividends, at rates up to 39.6 percent.
  • These two layers of tax alone thus put the effective tax rate on corporate income at as much as 61 percent.

The capital gains tax is really another layer of taxation on the same flow of income. If a share of corporate stock rises, it is only because of an increase in profits or dividends, both of which are already taxed. With short-term capital gains taxed as ordinary income and long-term gains taxed as much as 20 percent, the ultimate tax rate on corporate income is between 69 percent and 76 percent. (The estate tax is actually a fourth layer of taxation that can raise the total tax burden to more than 90 percent, but both Bauer and Forbes favor eliminating this tax.)

Abolishing the capital gains tax is not a give-away to the rich. Indeed, the Supreme Court once held that in principle capital gains are not income at all and ought to be free of tax -- though a later court reversed that stance. Taxing capital gains reduces investment and saving, which hurts all Americans by stifling job creation, lowering productivity and holding down wages.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, November 29, 1999.


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