NCPA - National Center for Policy Analysis

Investor Tax Relief

December 12, 2002

The Bush administration is looking at new tax initiatives that will have a quick, positive impact on growth. However, the key to helping the economy is long-term, not short-term, thinking. Bruce Bartlett says President Bush should move to revive the tax proposals announced after his Waco economic summit in August 2002.

These include increasing the amount of money workers can contribute to their 401(k) plans and relieving the double taxation of corporate profits.

  • Bush also proposed allowing investors to "expense" or immediately, fully deduct capital losses from taxable income.
  • The capital loss deduction is now limited to $3,000 per year above realized gains.
  • The loss limit has not been increased since 1978, but just indexing it to inflation would have raised it to almost $10,000 by now. (See Figure I.)

Bills introduced in the 107th Congress would have increased the limit up to $20,000; however, it is unlikely that losses will be fully offset, since they are so large due to the stock market crash.

In addition, cutting the capital gains tax rate would certainly have a positive impact on stock prices. When the capital gains tax was raised in 1969, the increase led to a flat to falling stock market for almost 10 years. When the rate was cut in 1978 and 1981, the decrease set off one of the greatest booms in history.

Source: Bruce Bartlett, "Investor Tax Relief," Brief Analysis No. 425, December 12, 2002, National Center for Policy Analysis.

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