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![handle is hein.taxfoundation/iretcgadv0081 and id is 1 raw text is: Advisory
July 13, 1999 No. 84
CUT TAXES ON CAPITAL GAINS
AND DIVIDENDS TOO
Representative Bill Archer (R-TX), Chairman of
the House Ways and Means Committee, announced
that a key element of his tax
relief plan this year will be
lower capital gains tax rates Representative
for individuals. He would cut lower capital
the top rate from 20% to 15%, individuals... J
and the rate for individuals in Senator Coni
the 15% ordinary income tax would.. extei
bracket from 10% to 7.5%. reductions to d
Senator Connie Mack (R-FL)
would similarly reduce the
capital gains rate, and would
extend the same rate reductions
to dividends received by individuals. Cutting the
capital gains tax would reduce the anti-saving bias
in the tax system. The bias
could be reduced further by
extending similar tax relief to Cutting the
dividends received by would reduce
individuals and to capital gains in the tax syst
and dividends received by be reduced fut
corporations. Similar tax I
Individual capital gains tax received by i
rates were last lowered in capital gairn
1997. At that time, the received by cot
maximum rate dropped from
28% to 20%, and the rate for
individuals in the 15% ordinary income tax bracket
dropped from 15% to 10%.1 There is clear
evidence that the 1997 capital gains tax cut
benefitted the economy.2 The 1997 legislation did
not lower the tax rate corporations pay on their
capital gains (it is still 35% for large corporations).
Although it may appear that the direct
beneficiaries of capital gains tax relief are capital
owners, most of the total economic benefits go to
labor. Workers gain because people are paid
according to their productivity, and a lower capital
gains tax leads to more capital formation (by
reducing the cost of capital) and higher productivity.
When investment increases GDP by $1, labor
receives almost 50 cents of the added income on an
after-tax basis; capital owners receive only about 5
cents, net, after paying taxes and setting aside about
10 cents to repla
Bill Archer [would]
gains tax rates for
romn 20%l' to 15%...
tie Mack (R-FL)
id the samne rate
ividends received by
widespread than
actually on the
cap~ital gains tax
the anti-saing bias
in. The bias could
rther by extending
delief to diidends
ndividuals and to
and didends
rprations.
ice capital; and federal, state, and
local governments take about
35 cents in taxes.
Some opponents of capital
gains tax relief would raise the
fairness issue; the majority
of capital gains are taken by
upper income taxpayers,
although people in all tax
brackets report some gains,
and stock and small business
ownership is much more
a generation ago. Fairness is
side of the tax cut. The tax on
capital gains is triple taxation;
in fact, it is one of several
added layers of tax imposed on
income that is saved (taxes that
are not imposed on income
used for consumption). This
excess taxation is unfair to
savers, and when the result is
reduced investment,
productivity and wages, it is
unfair to workers too. Because
the capital gains tax is unfair
to begin with, the fairest action
would be to eliminate it. If it is not eliminated, it
should at least be reduced.
Institute for
Research on the
Economics of
Taxation
IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the
public about policies that will promote econornic growth and efficient operation of the free market economy.
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