Research & Commentary: Capital Gains Taxes

Published August 30, 2010

The current capital gains tax rate of 15 percent is set to increase substantially at the end of the year as the 2001 and 2003 tax cuts sunset.

The current rate is lower than rates in only nine of the 25 major economies in the world, according to a report by Ernst & Young. If the capital gains tax rate is allowed to increase from 15 to 20 percent, the United States will have a lower tax than only six of those countries. This 33 percent tax hike will further hurt the competitiveness of the U.S. economy and discourage domestic investment.

According to a study by the Institute for Research on the Economics of Taxation on the effect of capital gains tax rates, “Higher taxes on capital retard capital formation and reduce wages across the board. The particular tax increases that the Congress and the Administration are most likely to adopt would damage the economy and reduce the tax base. In fact, they are likely to result in lower federal revenues, and larger budget deficits.”

With the U.S. economy still struggling to crawl out of the economic downturn, it’s important to avoid policies that hinder capital formation and investment in U.S. markets, as raising capital gains tax rates would do. Instead, Congress should focus on making the tax code less distorting and cumbersome, to help foster economic growth, not kill it.

The following articles offer additional information on capital gains taxes.


The Effect of the Capital Gains Tax Rate on Economic Activity and Total Tax Revenue
This study by the Institute for Research on the Economics of Taxation identifies how taxpayers and investors react to capital gains tax rates: “The tax treatment of capital gains and dividends greatly affects the quantity of capital created and employed. The quantity of capital affects the productivity, wages, and employment of labor. Output and incomes are lower at higher levels of taxation of capital. Raising the tax rate on capital by increasing the tax rate on dividends and capital gains from current levels would shrink national income across the board.”

U.S. Individual Capital Gains Tax Rates High
This special report commissioned by the American Council for Capital Formation compares the capital gains taxes of the top 25 national economies. The report notes, “The 2003 capital gains tax cuts have also been a boon to the U.S. economy. Extension of the 15% rate is crucial to maintaining the U.S. competitive edge against its major trading partners.”

Economic Effects of Increasing the Tax Rates on Capital Gains and Dividends
The Heritage Foundation finds that rolling back the 2003 tax cuts on capital gains and dividends would slow economic growth: “The slower economy causes employment to shrink by 270,000 job in 2011 and 413,000 in 2018. Similar job losses continue for the next seven years of our model’s forecast horizon of 2008 through 2018.”

The Economic Costs of Capital Gains Taxes
This study from the Fraser Institute outlines the effects of capital gains taxes: “Unfortunately, the cost of capital gains taxes is not limited to the amount of tax collected. Capital gains taxes impose additional costs on the economy because they reduce returns on investment and, thereby, cause individuals and businesses to alter their behaviour.”

Research & Commentary: Extending the Bush Tax Cuts
This Research & Commentary by Heartland Institute Budget & Tax Legislative Specialist John Nothdurft looks at what will happen if the Bush tax cuts are allowed to expire. “Without serious spending reforms the nation’s deficits will remain inevitable and incurable regardless of how many taxes are raised or how much. The best way to rein in the deficit is to control spending and create an economic environment that fosters growth and thus provides more revenues,” Nothdurft writes.

Tax Cut Permanency Report #1: The Capital Gains Tax
Raymond J. Keating, chief economist for the Small Business & Economic Council, explains why Congress and the president should make the cuts in the capital gains tax permanent: “Since a capital gains tax reduction boosts investment, entrepreneurship and the economy, the government does not suffer the revenues losses that static analysis would predict.”


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartland Institute’s Web site at and Budget & Tax News at

If you have any questions about this issue or The Heartland Institute, you may contact Legislative Specialist John Nothdurft at [email protected] 312/377-4000.