Capital Gains Tax in The United States - Rationale

Rationale

In the Fiscal Year 2012, the lower tax rate of long term capital gains meant $38 billion less in taxes was paid to the federal government. The 2007 capital gains tax revenue of $123 billion was equal to 75% of the Fiscal Year 2007 budget deficit. Capital gains taxes and tax cuts disproportionately affect high income households, since they are more likely to own assets that generate the taxable gains.

Supporters of taxing long term capital gains at a lower rate than other income say that it encourages investment, which creates jobs and helps the economy grow, even providing more revenue than a higher rate. Studies have shown that with each $1 billion increase in investment an additional 15,000 jobs are created.

According to Mark LaRochelle of the conservative newspaper Human Events, cutting the capital gains rate increases employment. "After the devastating dot-com bust and terrorist attacks of 2001, annual growth averaged just 1.8 percent. But after George W. Bush gradually cut the rate (from 21.19 percent to 16.4 percent by 2003) average annual GDP growth increased a full percentage point, to 2.8 percent." By 2007, tax revenues increased by $785 billion dollars and 8 million new jobs were created.

However comparing capital gains tax rates and economic growth in America from 1950 to 2011, economist Len Burman found "no statistically significant correlation between the two", even after using a "lag times of five years." (see "Top Capital Gains Tax Rates ..." chart to right) Burman shared his data with several economists but none came back having discovered a historical relationship between the rates and growth over those six decades. According to Burman, `If they found the relationship, they’re saving it for a special time.`

There also appears to be "little or even a negative" correlation between capital gains tax reduction, and rates of saving and investment, according to economist Thomas L. Hungerford of the nonpartisan Congressional Research Service.

"Saving rates have fallen over the past 30 years while the capital gains tax rate has fallen from 28% in 1987 to 15% today .... This suggests that changing capital gains tax rates have had little effect on private saving".

Studying economic growth and changes to the top marginal tax rates for capital gains (and other personal income) from 1945-2010, Hungerford found, “The reduction in the top tax rates appears to be uncorrelated with saving, investment and productivity growth. The top tax rates appear to have little or no relation to the size of the pie.”