NCPA - National Center for Policy Analysis


August 10, 2007

Tax revenues can be increased by eliminating capital gains taxes because capital itself exerts a multiplier effect that raises all levels of economic activity, generating additional tax revenues far in excess of what government would lose by foregoing them, says Donald Luskin is chief investment officer of Trend Macrolytics LLC.

Further, the cap-gains tax is a poor revenue raiser, because any given capital gain is a one-time event. Consider the example of Microsoft:

  • Since the company went public 20 years ago, its market value has increased by about $275 billion; a generous estimate of the cap-gains tax revenues we could expect from this increase is about $40 billion.
  • Actual collections will surely be less; many shares will never be sold -- held by founders who wish to retain control or by people who wish to avoid paying taxes.
  • Even for those shares that will eventually be sold, from today's perspective the resulting tax revenues have to be discounted, as they won't be collected for years.

At the same time, Microsoft has been a fountain of other tax revenues, says Luskin:

  • Since the company went public, corporate taxes already paid total roughly $60 billion while sales taxes paid by Microsoft's customers total roughly $11 billion.
  • Income taxes paid by Microsoft's employees total roughly $12 billion, and dividend taxes paid by Microsoft's shareholders total about $3 billion.
  • These sources of tax revenues over the last 20 years total $86 billion -- more than twice the estimate of the cap-gains tax revenues for the same period.

While eliminating the cap-gains tax may well induce companies like Microsoft to generate additional taxable activity, there's a more important opportunity here, says Luskin.  Eliminating the cap-gains tax will cause the economy to generate more innovators like Microsoft.

Source: Donald Luskin, "Cap-Gains Logic," Wall Street Journal, August 10, 2007.

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