Capital Gains Taxes: Distributional Effects

Publication Date: September 1999

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

Many types of data have been presented to illustrate who pays capital gains taxes (and who might benefit from a reduction in these taxes). These different approaches include absolute measures of distribution (such as how the tax is distributed relative to the distribution of the population and the average tax paid), relative measures of distribution (whether after-tax incomes would become more or less equal without the tax), measures of the distribution of tax liability, and measures of who pays the tax.

These measures are presented for 1999 and indicate that capital gains taxes are concentrated among high income individuals. Those with earnings over $200,000, who constitute the top 1.8 percent of income, account for 78.6 percent of capital gains taxes. While the average capital gains tax paid is $476, the average for the highest income class is $20,536 and the average for the bottom half is less than $10. Capital gains taxes contribute to a progressive tax system: while capital gains taxes average 1.3 percent of disposable income, they account for 5.7 percent in the highest income bracket and less than one tenth of one percent for the bottom 70 percent of the population.

Some of this concentration in higher income classes occurs because of the concentration of taxes at higher income levels. However, capital gains taxes are also concentrated relative to other taxes. The capital gains tax is 4.5 percent of total federal income, payroll and excise taxes; however, it is 14 percent of total taxes in the highest income bracket, and less than one half of one percent for the bottom 70 percent of the population. For the income tax alone, capital gains taxes are 8.1 percent of total income taxes, but 16.2 percent of income taxes in the top income class. In the bottom 70 percent of the distribution, the capital gains tax is less than one percent of income taxes.

About a quarter of taxpayers who pay a capital gains tax are in the bottom 70 percent of the distribution, while 11 percent of capital gains taxpayers are in the top 1.8 percent of the population. About 12 percent of all taxpayers pay a capital gains tax; in the highest income class, 75 percent pay a capital gains tax.

This report will not be updated unless new data become available.