To Raise the Capital Gains Tax Rate Is to Not Raise Capital Gains Taxes

The Committee for a Responsible Budget recently analyzed the preferential rates on capital gains and dividends, concluding that raising the top tax rate above the current 23.8 percent would bring in more tax revenue. They figure that the revenue-maximizing rate on capital gains is about 30 percent, which is roughly what the Joint Committee on Tax and Treasury Department assume as well in their revenue estimates. Any higher than that, they figure, and investors will reduce their capital gains realizations so much that tax revenue will go down, says Will McBride, chief economist at the Tax Foundation in Forbes.

This is not the case when behavioral effects are accounted for. Data from the U.S. Treasury shows an inverse relationship between the top tax rate and revenue. This indicates that high tax rates bring in less revenue. In fact, there is a negative correlation of 0.39.

The period 1954-1980 experienced the highest top tax rates.

– On average, rates were 29.13 percent.

– This was also the lowest tax revenue, on average 0.38 percent of gross domestic product (GDP).

The period 1987 to 1996 experienced the second highest top tax rates.

– On average, rates were 28.66 percent.

– This was also the second lowest tax revenue, on average 0.6 percent.

In contrast, the period 1981-1986 experienced a relatively low top tax rate.

– On average, rates were 20 percent.

– In addition, average tax revenue was higher at 0.62 percent of GDP.

Finally, the period since 1997 has seen the lowest top tax rates.

– On average, rates were 18.26 percent.

– And the highest tax revenue, on average, was 0.77 percent of GDP.

Meanwhile, our revenue estimating agencies, including the Congressional Budget Office, continue to assume a higher revenue maximizing tax rate than can be supported by the facts.

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