NCPA - National Center for Policy Analysis


January 27, 2005

Taxes paid on capital gains have been highly responsive to the maximum capital gains tax rate, according to the Wall Street Journal, further demonstrating that tax rates influence taxpayer behavior.

Especially notable:

  • Capital gains realizations have tended to increase in the years following a cut in the capital gains tax rate, including 1978, 1981, and 1997 (when the rate was cut as part of the Clinton-Gingrich balanced budget deal).
  • By contrast, capital gains increases have proven to be a revenue disaster; in 1986, after the rate was increased from 20 percent to 28 percent, taxes paid on long-term capital gains fell from $52.9 billion to $33.7 billion in 1987.

Reductions in tax rates cause taxpayers to cash in more of their gains and thus yielding revenue windfalls for the federal Treasury. Meanwhile, higher rates have rarely done any good, despite the hopes of politicians that they'd be getting more tax revenues to spend, explains the Journal.

Of course, tax-rate changes are not the only factors influencing revenues, with the broader economy and stock market also having an important impact.

Source: Editorial, "Gaining Capital," Wall Street Journal, January 24, 2005.

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