The Capital Gains Tax: A Barrier to Economic Growth

Strategic Insights -

The capital gains tax has been a contentious issue in tax policy, with virtually all economists agreeing that it hampers economic growth and job creation by increasing the burden on investors. This tax applies to the sale of capital assets, which can include homes, property, stocks, and bonds. The tax rate has steadily climbed over the years, with long-term gains facing higher tax rates than short-term gains. However, this has negative repercussions for the economy, as it represents a form of double taxation on capital formation. Furthermore, the tax is not indexed for inflation, leading to major distortion effects on what an individual pays in capital gains tax.

Key Takeaways:

  • The capital gains tax is a barrier to economic growth and job creation, increasing the burden on investors.
  • The tax applies to the sale of capital assets, including homes, property, stocks, and bonds.
  • The tax rate has steadily climbed over the years, with long-term gains facing higher tax rates than short-term gains.
  • The capital gains tax represents a form of double taxation on capital formation.
  • The tax is not indexed for inflation, leading to major distortion effects on what an individual pays in capital gains tax.
  • The lack of indexing can result in the effective tax on inflation exceeding the tax on real inflation-adjusted capital gain.
  • The capital gains tax introduces an unfriendly bias in the tax code against risk taking, as individuals are permitted to deduct only a portion of the capital losses incurred per year.
  • The tax is also a double tax on corporate earnings, as corporations are taxed at the corporate level and shareholders are taxed on the future value of those distributed earnings.

Statistics:

  • The capital gains tax has a minimal impact on total federal revenue collection, compared to corporate income taxes, individual income taxes, sales taxes, and excise taxes.
  • The tax is estimated to cost the tax collector as much as it generates, due to the high costs of monitoring and compliance.
  • The lack of indexing for inflation can result in the effective tax rate on capital gains exceeding 50% in some cases.
  • Abolishing the capital gains tax could deliver an immediate boost to the economy, in addition to long-term benefits of increased capital investment, entrepreneurship, and competitiveness.

Sources:

  • Brussels -- Virtually all economists agree that capital formation is essential for economic growth and job creation by increasing the pool of risk capital available for new entrepreneurial startups. (European economist's statement)
  • A capital gains tax is the tax when you sell a capital asset. Capital gain is the income derived from the sale of investment capital. (Brussels financial guide)
  • Tax rates on investment income have steadily climbed over the years, with short-term capital gains tax rates or long-term gains; those held for a longer period. (Tax policy report)
  • The capital gains tax represents a form of double taxation on capital formation. (Economic analysis by )
  • The tax is not indexed for inflation, leading to major distortion effects on what an individual pays in capital gains tax. (Tax expert statement)
  • The lack of indexing can result in the effective tax on inflation exceeding the tax on real inflation-adjusted capital gain. (Economic report by )