NCPA - National Center for Policy Analysis


January 29, 2008

If anyone still wants to reduce a tax that really would pay for itself, the Congressional Budget Office has the latest data on the revenue boom in the wake of the 2003 capital gains tax cut, says the Wall Street Journal.

The tax rate fell to 15 percent from 20 percent, yet revenue collections have climbed by 152 percent in four years.  The response by investors has been much larger than even many advocates had hoped to see:

  • In 2002, the year before the tax cut, the capital gains realizations that filers report on their tax returns were $269 billion.
  • Realizations grew smartly in each succeeding year and CBO is now projecting that the total for 2007 will be $863 billion.

Yes, the stock market rose during that period along with the larger economy.  But the lower rate also gave investors more of an incentive to "unlock" their gains, taking profits and then reinvesting the net proceeds, says the Journal:

  • The government gets 15 percent on the gain, instead of 20 percent, but there are more transactions to tax as investors worry less about the tax consequences of cashing out a profitable investment.
  • Notably, 79 percent of the tax returns reporting capital gains in 2005 were from filers with incomes of less than $100,000 a year.

This blowout in taxable gains has in turn translated into a revenue windfall for Uncle Sam.  CBO now estimates that the capital gains tax will collect $127 billion in 2007, up from $49 billion in 2002.  Capital gains revenue has undeniably been a major contributor to the decline in the budget deficit in recent years.

Source: Editorial, "Dynamic Scoring," Wall Street Journal, January 29, 2008.

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