Wednesday, September 26, 2012

Lower Capital Gains increases Revenue... Numbers do NOT Lie...!


An important, but too often overlooked, argument against higher taxes on capital gains is the actual amount of revenue generated by arbitrarily determined tax rates.
In a paper titled "Federal Capital Gains Tax Collections, 1954-2008," the Tax Foundation reports that federal capital gains tax receipts in 1978, the last year the maximum long-term tax rate on capital gains was 39.87%, totaled $9.14 billion. The next year the capital gains tax rate was reduced to 28%. Capital gains tax receipts increased immediately. Three years later the Economic Recovery Tax Act of 1981 reduced the maximum capital gains tax rate again, this time to 20%. By 1983, the second year of lower tax treatment of capital gains, capital gains tax receipts rose 45% to $18.7 billion. By 1986, five years after implementation of lower tax treatment of capital gains, capital gains tax receipts hit $52.9 billion, an increase of 313% over 1981, the last year of the maximum 28% long-term capital gains tax rate.
One year later, in 1987, the maximum tax rate on long-term capital gains returned to 28% and capital gains tax receipts promptly fell 36% to $33.7 billion. Capital gains tax receipts didn't exceed the high-water mark of 1986 until 1996, a full decade later, when receipts totaled $66.3 billion. That 10-year period (1987-1996) saw total GDP increase 75%, to $7.8 trillion, yet capital gains tax receipts fell as the maximum long-term capital gains tax rate was increased, first to 28% (1987), then to 29.19% (1993).
Capital gains tax rates were lowered a year later in 1997. As a result, capital gains tax receipts rose 60% through 2000. Despite a sharp decline over the next two years caused largely by the 45% drop in the stock market, capital gains tax receipts rose 42% from $49.1 billion in 2002 to $73.2 billion in 2004, the first year of reduced capital gains tax rates legislated in 2003. By 2007, the fourth year of lower capital gains tax rates mandated by the 2003 Bush tax cuts, total capital gains tax receipts hit $137 billion, an all-time high, despite the lowest capital gains tax rates since 1933.
There may be more high-income earners paying capital gains taxes on carried interest today than in years past, but clearly there is no evidence that raising tax rates on capital gains creates more capital gains tax receipts.

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