Third , reducing the tax rate for capital gains actually would increase tax revenues from taxpayers who own most of the appreciated assets. Experience over the last 25 years with changes in capital gains tax rates strongly indicates that rate decreases produce more declarations of capital gains and more capital gains taxes. Owners of appreciated assets who face high tax rates generally hold on to their assets in anticipation of lower future rates. When the rates come down, the amount of capital gains goes up. Some economists have estimated that significant capital gains rate changes could produce substantial economic benefits and create revenue windfalls for federal and state governments.
Many politicians agree.
In an article last year for the American Economic Review , Leonard Burman and William Randolph, the two leading tax economists on the staff of the Congressional Budget Office, estimated the response of taxpayers to rate reductions as being on the order of 6 to 1. That is, for every one percent drop in the rate, capital gains realizations would rise by 6 percent. If, indeed, the federal government wants to draw more tax revenue from wealthy Americans, lowering the capital gains tax rate is one of the most effective ways possible to attain this objective. The data about average incomes and capital gains declarations contained in this paper come from the IRS's Public Use File for 1991. This file contains about 115,000 composite tax returns that the IRS has constructed to reflect all 114 million returns filed in 1991.