NCPA - National Center for Policy Analysis

WHO BENEFITS FROM CAPITAL GAINS TAX CUTS?

January 5, 1996

Congress has proposed cutting taxes on capital gains, the net income from the sale of assets, by 50 percent for individual taxpayers, and it proposed lowering the maximum tax by 20 percent for corporations.

Supporters argue that lowering capital gains taxes will stimulate economic growth by encouraging taxpayers to sell assets, unlocking the capital gains they haven't been willing to realize at the currently high tax rate. On the other hand, critics claim these changes would disproportionately benefit wealthy Americans, making the tax system less "fair."

However, a look at who capital gains taxpayers are shows that the majority of benefits to individual taxpayers would accrue to the non-wealthy. Looking at the figures for tax returns filed in 1991, for example:

  • More than 15 million federal income taxpayers, representing about 11 percent of all taxpaying households, declared capital gains that year.
  • The typical household declaring a capital gain had income from sources other than capital gains of $58,729 and the typical capital gain for that household was $973.
  • In fact, half of all capital gains were earned by households with incomes from other sources of less than $100,000, and these households accounted for 52 percent of all non-capital gain income reported.
  • Changes in capital gains tax rates over the past 25 years indicate that reducing rates produces more realizations of capital gains, thus increasing federal revenues.

Today, American taxpayers may hold as much as $7.5 trillion in unrealized capital gains. According to the Congressional Budget Office, each 1 percent drop in the capital gains tax rate would increase realization of gains by 6 percent.

In 1991, taxpayers with incomes above $200,000 declared 36 percent of all capital gains, but only about 30 percent of all non-capital gain income. Thus, the increased realizations that would result from lowering the capital gains tax rate would result in the wealthiest income group paying the largest share of the increased tax revenue.

Source: William W. Beach, "Balanced Budget Talking Points #2: Who Will Benefit From Cuts in Capital Gains Taxes?" FYI, December 4, 1995, Heritage Foundation, 214 Massachusetts Avenue, NE, Washington, DC 20002, (202) 546-4400.

 

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