NCPA - National Center for Policy Analysis


January 5, 1996

A capital gain is the increase in value of an asset, such as a share of stock or a bond or a business. Congress has proposed halving the tax on capital gains, but there is a good argument for not taxing them at all.

The capital gains tax raised $25 billion to $30 billion per year for the federal government in the early 1990s - barely 6 percent of income tax receipts or 3 percent of total federal revenue. This is less than one month's interest on the national debt.

  • Many prosperous countries, such as Germany, Singapore, South Korea and Taiwan, have a zero capital gains tax.
  • Many of the gains in recent decades were the result of inflation, but were taxed as income, leaving investors with very low or even negative returns on their investments.
  • The tax can be avoided by not selling assets that have increased in value.
  • The result is a vast amount of capital that's locked in to specific investments, instead of flowing to other investments where it might be more productive.

Some people argue that not taxing capital gains would allow the rich to avoid taxation by receiving their income in the form of assets that would become more valuable, rather than producing a stream of taxable income, such as dividends from a stock or interest on a bond.

However, this argument ignores the fact that there is no guarantee that an asset will increase in value, and therefore most people, including the rich, would rather invest their money in things likely to produce income.

In fact, a capital gain is the hoped for reward for risk-taking, such as making a capital investment in a start-up enterprise. And the social benefit of capital investment is more jobs, productivity and wealth.

Source: Rob Norton, "Let's Dump the Capital Gains Tax," Fortune, December 25, 1995.


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