Fifteen Percent Is Fine, but Indexing Is Divine
VICTOR A. CANTO AND HARVEY B. HIRSCHHORN
The debate about capital gains taxation has been reopened by President George Bush. During the 1988 presidential campaign Bush stated that the maximum tax rate on capital gains on assets held for over one year should be lowered to 15 percent from the current 28 percent rate. He argued that, over time, the reduction in the capital gains tax rate would raise investment, national income, labor productivity, the capital stock, and the overall standard of living. Bush believes that the proposed tax rate reduction might even increase federal tax revenue. It has been reported that such a two-tiered tax rate reduction would also reduce volatility in the stock market.
Historically, capital gains tax receipts have comprised 5 percent of personal income tax receipts and less than 2 percent of all federal revenue. Moreover, capital gains on stock transactions have accounted for only one-third of total capital gains. Therefore, if viewed from a static framework, the capital gains tax would appear to have minor impact on the economy. If the rate reduction is to have the desired effect on the economy, it must have a profound effect on economic behavior through increased incentives.
Researchers and policy makers continue to dispute whether a capital gains tax rate reduction would increase or decrease capital gains tax revenues. Accurate tax revenue estimation requires an understanding of the appropriate measurement