NCPA - National Center for Policy Analysis


October 16, 2007

All of the leading Democratic contenders for President have endorsed higher taxes on capital gains, ostensibly to restore "fairness" (increase the amount the rich pay) to the tax code, says the Wall Street Journal.

But it's not only the wealthy who will take a hit from higher capital gains taxes:

  • Recent surveys indicate that roughly 52 percent of American adults own stock in some form, and last year 8.5 million of these investors paid a capital gains tax.
  • The value of those assets will decline if capital gains taxes go up because financial markets instantly capitalize higher taxes on stock profits into lower stock prices.
  • A study by former Treasury Department economist Gary Robbins found that from 1946-1998, about 90 percent of the returns to capital investment accrued to workers in the form of higher wages.

Further, for the past 40 years, capital gains tax increases have been associated with a decline in tax revenues.  Rate cuts have generated more tax collections:

  • After the 1997 capital gains tax cut Congress's Joint Committee on Taxation predicted that the government would collect $195 billion from 1997 to 1999 from capital gains payments.
  • The actual amount was $279 billion; in other words, the lower tax rate raised $84 billion more than expected -- which is one reason the late 1990s produced budget surpluses.
  • Most recently, the 2003 tax cut produced a doubling of tax receipts to $97 billion in 2005 from $47 billion in 2002, twice what Congress predicted.

What's especially striking about this year's Democratic economic proposals is how little any of them mention economic growth, says the Journal.  Their message is "fairness," inequality and income redistribution.  They seem to think taxes can be raised with ease, and no one's behavior or investment choices will change.

Source: Editorial, "A Capital Gains Primer," Wall Street Journal, October 15, 2007.

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