The Rationale for Low Capital Gains Tax Rates

Republican Staff Commentary

Nov 17 2010

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Capital gains tax rates have historically been lower than ordinary income tax rates for a number of reasons, including the positive economic effects of investment and the impact of inflation on capital gains.    Additionally, strong behavioral responses and the potential to avoid capital gains taxation altogether have contributed to lower capital gains tax rates.  As the top tax rate on capital gains is set to rise 33% in 2011 (to 20%), and then by another 19% in 2013 (to 23.8%) when the health care surtax kicks in, static government revenue estimates have vastly overstated the additional revenue that may be raised from these tax hikes.  A number of dynamic analyses have found that the negative economic feedback effects of higher capital gains tax rates mean that the scheduled tax hikes will bring in little to no additional revenue, and could even increase budget deficits. 

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