NCPA - National Center for Policy Analysis

1997 Capital Gains Cut Was An Unqualified Success

July 15, 1999

Even champions of the 1997 reduction in capital gains tax rates have been astonished by the economic results. The cut increased asset values and contributed to the largest gain in productivity and private sector capital investment in a decade, while also dramatically increasing federal tax receipts.

Once the rate was cut from 28 percent to 20 percent, investors felt freer to sell assets and reinvest the proceeds -- unlocking capital even though the transactions subject gains to the nation's tax collectors.

  • As a result, realized capital gains surged 34 percent from 1996 levels in the first year alone.
  • That propelled a 27 percent increase in receipts from the tax -- to $79 billion from $62 billion.
  • Moreover, economists predict capital gains collections from 1998 will be at least $89 billion -- bringing the two-year boost in revenues from the tax to about 40 percent.
  • By contrast, after Congress raised the capital gains rate back to 28 percent in 1986, revenues plummeted from $50 billion that year to $36 billion in 1989 and $25 billion in 1991.

For the two-thirds of Americans who own their own homes, very favorable capital gains provisions for housing have corresponded with a 10 percent increase in housing values since early 1997. For the 85 million to 100 million Americans who own stocks, mutual funds or retirement plans, equity values have risen by more than $2.5 trillion during the same period.

The 1997 cuts also increased global capital flows to the U.S. From 1996 to 1998, net foreign capital investment in the U.S. has more than doubled -- from $80 billion to $200 billion.

Economists say these events provide unassailable arguments for adopting a further cut to 15 percent, as House Ways and Means Chairman Bill Archer is proposing.

Source: Stephen Moore (Cato Institute), "Capital Gains Tax Cuts Aren't Just for the Rich," Wall Street Journal, July 15, 1999.


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