About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

Capital Gains Taxes and Federal Revenues [i] (October 2002)

handle is hein.congrec/cbo0722 and id is 1 raw text is: REVENUE AND TAX POLICY BRIEF CBO A series of issue summaries from the Congressional Budget Office October 9, 2002 Capital Gains Taxes and Federal Revenues Capital gains taxes often garner policy attention that is disproportionate to their importance in generating federal revenues. One reason is that the realization of gains is very sensitive to capital gains tax rates, leading to speculation that changes in rates--and the alleged failure to take into account their effect on taxpayers' willingness to sell assets--explain how revenue forecasters have been surprised by movements in tax receipts. Another reason is that gains are a way in which earnings are paid to investors, prompting the idea that well-designed changes in the gains tax rate can significantly influence economic growth, with potentially large feedback effects on revenues. This revenue and tax policy brief outlines the basics of capital gains taxation in the context of estimating individual income tax receipts. Characteristics of Gains and Gains Taxes A capital gain is an increase in the value of an asset; a decrease in an asset's value is a capital loss. The concept applies to all assets, including corporate stock, commercial real estate, collectibles, homes, and nonincorporated businesses. Assets fluctuate in value all the time, and as their prices change, capital gains and losses accumulate. Those accrued losses and gains are not realized, however, until the assets are sold and the former owner captures the gain (or loss). When a gain accrues, it is a form of income for the holder of the asset. But a gain is not counted as income for income tax purposes until it is realized.0!) At that time, the difference between the sale price and the asset's basis--the acquisition price minus depreciation and other adjustments--is includable in the owner's taxable income. Even then, the gain may not be subject to tax. A gain from the sale of an owner-occupied home, for example, typically is not taxed. And when an asset holder dies, the basis of the asset that is passed along to heirs is stepped-up--that is, the basis becomes the asset's value at the time of the holder's death, effectively exempting from taxation the gains that had accrued until then.M2) The way the tax code treats capital gains income is in certain respects more favorable and in others less favorable than the way it treats income from some other sources. Because of inflation, the difference between the sale price of an asset and its basis overstates the income that the asset holder earns; taxes are thus imposed on phantom income created by inflation, a characteristic that the taxation of gains has in common with the taxation of interest income. At the same time, gains are treated favorably by not being taxed when earned but when realized, which is often many years later. Because money today is worth more than the same amount of money in the future, deferring payment of capital gains taxes is a powerful advantage and can overwhelm the disadvantageous effects of inflation, especially for assets that are held a long time. Finally, realizations of long-term capital gains--defined generally as those on assets held for more than a year--are taxed at rates lower than those imposed on

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Purchase Access

Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most