Capital Gains Tax Increase

The Illusion of the Capital Gains Tax Increase
Policymakers and researchers have long been interested in how potential changes to the capital gains tax system affects the health of the overall economy. A capital gain is the increase in the value of a capital asset realized over its cost basis (Saxton). The lower tax rate for capital gains is the policy that the United States has followed from the inception of the income tax, a policy followed by almost every other advanced economy on earth. As numerous politicians continue to push for increased taxation of those who profit from capital gains, it is worth examining the effects of increases in the capital gains tax rate. Increases in the capital gains tax rate has had effects on economic growth,
Increases of capital gains taxes works counterintuitively toward the goal of strengthening the economy. Economist Allen Sinai estimates that a capital gains tax reduction could increase real inflation-adjusted gross domestic product by an average of $51 billion annually, create 500,000 new jobs by 2019, and increase business spending by an average of $18 billion annually. The effects of increased investment and economic growth would reverberate throughout the entire economy in the form of higher wages and rising living standards (Saxton). Furthermore, outdated tax codes mean marginal efficiency, producing insignificant results for the government (Mitchell). It is estimated that capital gains taxes impose a marginal cost of $0.92 for one additional dollar of revenue (Mitchell). Capital formation is essential to generating higher incomes for American workers. Between 1900 and 1990 real wages in the United States rose about sixfold (Romer). In other words, a worker today earns as much, adjusted for inflation, in 10 minutes as a worker in 1900 earned in an hour (Moore.) That surge in the living standard of the American worker is explained by the increase in capital over the period. Therefore, increases in capital gains taxation has decreased the total output of the economy while only
When capital gains tax rates are high, astute investors avoid paying the tax by holding onto assets that they would otherwise have sold. This creates the “lock-in” effect, by which economists estimate that trillions of dollars are not taxed because investors refuse to pay a high tax on their profits (Saxton). Higher tax rates cause people to change their behavior, and are encouraged to work less because they get to keep less of what they earn. Expected revenues do not materialize because tax hikes depress the rate of growth in the economy (Entin). For these reasons, increases in capital gains taxation has worked counterintuitively in generating