NCPA - National Center for Policy Analysis

A No Cost Capital Gains Tax Cut

July 12, 1999

In a few days, the fireworks are likely to go off again when congressional Republicans push for a further reduction in the capital gains tax. Such a provision will almost certainly be included in the tax bill Republicans hope to pass before the August recess. A new study supports their efforts.

Democrats reluctantly went along with a cut in the capital gains tax rate was cut from 28 percent to 20 percent in 1997 (18 percent on assets purchased after the year 2000), although they argued it would cost the federal government revenue, would do nothing to stimulate the economy, and was just a giveaway to the rich.

A new study of the 1997 legislation by Standard and Poor's DRI, a respected economic consulting firm, shows the opponents were wrong.

  • The tax cut stimulated both economic growth and higher stock prices.
  • As a result, the study concludes that the cut in the capital gains tax -- which was estimated to lose $275 billion over 10 years -- will not cost the Treasury anything.
  • The additional revenues from higher stock prices, greater turnover and faster growth will offset 100 percent of the revenue loss from a lower rate and taxpayers' reclassifying ordinary income into capital gains.

In recent testimony before the House Ways and Means Committee, Mark Bloomfield of the American Council for Capital Formation, which sponsored the DRI study, said that it supports a further cut in the capital gains tax rate. Most other major countries already tax capital gains at a lower rate than the U.S., he pointed out. In Britain, for example, the top rate is just 10 percent and in Germany there is no capital gains tax.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 12, 1999.


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