A Capital Gains Tax Cut: The Key to Economic Recovery
by Stephen Moore, Phil Kerpen on 10/11/2001
28 Pages
The events of September 11, 2001 plunged an economy already teetering on the edge of recession into a situation of economic crisis. The stock market has lost more than $1 trillion in valuations since the terrorist attacks and many industries are now laying off record numbers of workers. The need for a change in fiscal policy—particularly tax policy—as a stimulus for the fragile economy may very well be necessary to avert a long and deep recession as the U.S. experienced in the late 1970s and early 1980s.
One option under discussion in the economic stimulus package is the proposal to cut the capital gains tax. Proposals for the capital gains tax cut include temporary cuts, permanent cuts, and total elimination. Opponents charge that such cuts would only provide a generous tax break to the rich, while substantially reducing federal revenues and not boosting the economy. Some opponents have even suggested that a capital gains cut may even harm the economy by encouraging Americans to sell their stocks and thus depressing the stock market even further.
This study examines the historical facts surrounding the capital gains tax in the United States, including the findings of 50 studies on the tax. We conclude that a cut in the capital gains tax rate would:
• Immediately increase the rate of capital formation, economic growth, and job creation. By one recent analysis, a capital gains tax rate reduction grows the economy by $10 for every $1 of lost revenues.
• Immediately raise the value of stocks by increasing the after-tax value of earnings of companies.
• Expand economic opportunities for the most disadvantaged workers through new business creation.
• Lead to very minimal short run federal revenue losses and perhaps raise long-term federal receipts by increasing the economic growth rate.
The experience of the 1997 capital gains tax cut validates the economic case for another rate cut. The 1997 capital gains cut had the following impact:
• Capital gains tax revenues climbed from $62 billion to $110 billion from 1996–1999. The federal budget moved from deficit to surplus over this period.
• The stock market rose from 7,000 to 10,000 in the 3 years following the rate cut.
• Venture capital funding soared from $10 billion in 1996 to $53 billion in 1999. The number of firms receiving venture capital funding climbed from 2,004 to 5,450 over this period.
• The GDP growth rate following the 1997 capital gains cut rose to an average of 4% per year from 1997–2000.
The evidence suggests that a capital gains tax cut enacted now would offer the most immediate boost to the economy and consumer confidence, by helping rally the stock market. The capital gains tax cut we endorse under the current economic circumstances would be devised as follows:
• The capital gains tax rate should be reduced from 20% to 10%.
• The rate reduction should apply only to gains accrued after September 11, 2001.
• The rate reduction should be permanent, not temporary.
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