NCPA - National Center for Policy Analysis

Market Gyrations Increase Calls For Capital Gains Tax Cuts

April 16, 2001

Some 12 percent of all individual income-tax receipts this year will come from capital gains. And more Americans than ever before have been hit with the tax this filing season.

That's prompting a groundswell of support for capital-gains rate cuts, even though President George W. Bush did not include such cuts in his tax plan. His aim was to focus tax relief on income from work -- rather than income from investments.

But a variety of factors are increasing public support for the cuts.

  • The 2000 tax year will be by far the biggest ever for capital-gains distributions to mutual-funds investors -- who can be taxed on their funds' capital gains even if they reinvest their gains and don't sell any of their mutual-funds' shares.
  • Calculations from the Investment Company Institute show that $345 billion is flowing back to shareholders on paper -- up from $238 billion in 1999, the previous high.
  • By contrast, distributions were just $8 billion as recently as 1990.
  • Although roughly two-thirds of those mutual funds are held in accounts that get special tax treatment, for the remainder the bite can be a large and unexpected expense -- especially among those whose mutual funds have taken hits recently.

One Capitol Hill proposal would exclude some mutual-fund capital-gains distributions from taxes -- up to $3,000 for individuals and $6,000 for couples. Another would shorten the one-year holding requirement for long-term capital gains. A growing number of congressional leaders favor cutting the capital-gains rate from 20 percent to 15 percent -- or even 10 percent.

Source: Tom Hamburger, John D. McKinnon and Shailagh Murray, "Capital-Gains Tax Cut Picks Up Momentum from Unlikely Alliance," Wall Street Journal, April 16, 2001.

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