How to Think about Capital Gains Taxation
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The 2003 tax cuts reduced the tax rate on long‐term capital gains from 20 percent to 15 percent, but this rate will return to the higher level on January 1, 2011. Proponents argue that the higher tax rate will bring additional money into the government coffers and make the tax system fairer. There are very strong arguments, though, that a capital gains tax discourages entrepreneurial activity and investment. Moreover, if the tax has a sufficiently large impact on the incentive to invest and the incentive to sell appreciated assets, then it is quite possible that assumptions of higher tax revenue are misguided. Another key issue is the degree to which a capital gains tax impacts capital mobility in a world where many countries do not tax capital gains. As policymakers consider capital gains and related tax issues, it is important that they understand how taxation impacts economic progress.