Economic and Revenue Effects of Permanent and Temporary Capital Gains Tax Cuts

Publication Date: January 2003

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

During the 107th Congress proposals were made to enact either a temporary or a permanent capital gains tax cut. The former would probably gain revenue in the first 2 years but lose that revenue and more, most likely within the following 3 years. H.R. 3090, passed by the House, would lower the top tax rate from 20% to 18% for assets held at least a year. The Senate Finance Committee version of H.R. 3090, did not reduce capital gains taxes. President Bush's current dividend relief proposal contains some capital gains relief as well. A capital gains tax cut appears the least likely of any permanent tax cut to stimulate the economy in the short run; a temporary capital gains tax cut is unlikely to provide any stimulus. Permanently lower capital gains taxes can contribute to economic efficiency in some ways and detract from it in others. Capital gains tax cuts would favor high income individuals, with about 80% of the benefit going to the top 2% of taxpayers. This report will be updated to reflect legislative developments.