NCPA - National Center for Policy Analysis

Principled Arguments Against Capital Gains Taxes

August 15, 2001

The death tax yields little revenue to the federal government, and there is evidence that due to estate planning to avoid the tax, it yields no net federal revenue.  But despite the economic case against the death tax, it was not repealed until many in Congress became convinced that estates should not be levied at all -- that the estate tax is unfair and should be abolished as a matter of principle.

Likewise, says former Treasury official Bruce Bartlett, while there are strong economic arguments for reducing the tax rate on capital gains to zero, that may not be achieved until Congress recognizes capital gains should not be taxed as a matter of principle.

The economic arguments are clear:

  • High effective capital gains rates reduce the capital stock and lower growth and productivity.
  • Capital gains taxes encourage a "lock-in" effect that discourages investors from selling their assets, reducing economic efficiency by putting too much capital in older investments at the expense of newer opportunities.

The arguments from principle are also clear:

  • Capital gains are not income -- as the Supreme Court held for many years, and even after the passage of the 16th Amendment.
  • Taxing the increase in the value of capital is a double tax, because the value of a capital asset is simply the discounted future earnings expected to flow from it.
  • Thus capital gains are already taxed more than once through the corporate and personal income tax -- and taxing appreciating stocks or real estate can be a third layer of taxation.

And finally, taxpayers aren't allowed to deduct losses when they sell their stocks. As a result, they can owe taxes even when losses far outweigh gains.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, August 15, 2001.


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