Policy Watch: Cutting Capital Gains Taxes

Abstract

From 1922 to 1986, long-term capital gains were taxed at lower rates than other income, generally by allowing a portion of long-term capital gains to be excluded from taxable income. While taxing capital gains at the same rates as other income has been hailed by some as a major accomplishment of tax reform, it has been criticized by others as one of its main flaws. As a result, there have been proposals each year since 1986 to restore some type of capital gains preference. These proposals have sparked a lively debate centered on three main questions: Would reducing the capital gains tax lower or raise federal revenues? Who benefits most from cutting the capital gains tax? Would lower tax rates on capital gains improve economic performance?