TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, February 3, 2006

WSJ on Revenue Effects of Capital Gains Tax Cut

Interesting editorial in today's Wall Street Journal, Tastes Great, More Filling:

Well, what do you know. The latest statistics on capital gains tax collections were recently released by the Congressional Budget Office, and receipts are not down but way up. By 45% to be exact. As part of President Bush's 2003 investment tax cut package, the capital gains tax rate was reduced to 15% from 20%. Opponents predicted, as ever, that this would reduce tax revenue.

Not even close. Here's what actually happened. This 25% reduction in the tax penalty on stock and other asset sales triggered a doubling of capital gains realizations, to $539 billion in 2005 from $269 billion in 2002. One influence was the increase in stock values over that time, thanks in part to the higher after-tax return on capital induced by the tax cuts.

But another cause for the windfall was almost certainly the "unlocking" effect from investors selling their existing asset holdings in order to realize some of their profits and pay taxes at the lower rate. They could then turn around and buy new assets, hoping for higher rates of return. This "unlocking" promotes the efficiency of capital markets by redirecting investment into new and higher value-added companies. It also yields a windfall for the Treasury. In 2002, the year before the tax cut, capital gains tax liabilities were $49 billion at the 20% rate. They rose slightly to $51 billion in 2003, then surged to $71 billion in 2004, and were estimated by CBO to have reached $80 billion last year -- all paid at the lower 15% rate. In short, the lower rate yielded more revenue.

Wsj_jpeg_1  

http://taxprof.typepad.com/taxprof_blog/2006/02/wsj_on_capital_.html

News | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341c4eab53ef00d83424c95953ef

Listed below are links to weblogs that reference WSJ on Revenue Effects of Capital Gains Tax Cut:

» Nine Trillion with a "T" from Pardon My English: Conservative News & Opinion
Most of us middle class slobs slugging it out in the trenches have a hard time comprehending $9 million or $9 billion, let alone $9 trillion, but $9 trillion is the amount the U.S. Senate just raised your debt ceiling and mine to: Thirty grand apiece f... [Read More]

Tracked on Mar 16, 2006 8:57:46 PM

» Nine Trillion with a "T" from Pardon My English: Conservative News & Opinion
Most of us middle class slobs slugging it out in the trenches have a hard time comprehending $9 million or $9 billion, let alone $9 trillion, but $9 trillion is the amount the U.S. Senate just raised your debt ceiling and mine to: Thirty grand apiece f... [Read More]

Tracked on Mar 16, 2006 8:59:45 PM

» Nine Trillion with a "T" from Pardon My English: Conservative News & Opinion
Most of us middle class slobs slugging it out in the trenches have a hard time comprehending $9 million or $9 billion, let alone $9 trillion, but $9 trillion is the amount the U.S. Senate just raised your debt ceiling and mine to: Thirty grand apiece f... [Read More]

Tracked on Mar 16, 2006 9:01:23 PM

» Tax and Spending Round-up from Time is a Factor
Tax and Spending Round-up Willisms updates a graphic on Federal spending to reflect entitlements: (snip) On the other side, Tax Prof Blog picks up on a WSJ editorial pointing out the rise in tax revenues following the capital gains cut - Tastes G... [Read More]

Tracked on May 21, 2006 11:52:07 AM

Comments