Capital gains tax

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A Capital-gains Tax is a fee on the sale of stock or real property, generally computed as a percentage of the thing's increase in value (or "gain").[1] America is divided over what this percentage (or "rate") ought to be.

Those who want the rich to pay their "fair share" usually advocate raising the tax rate as high as possible; this group generally consists of Democrats.

Source: US Gov't

Others have predicted that reducing the capital gains tax rate can actually increase the amount of revenue the tax generates (see Laffer curve). People tend to hold on to stocks or other investments when selling them causes their profit to be reduced too much by taxation. So, increasing the tax rate paradoxically reduces the amount of tax revenue. This is like when a store raises its prices, only to find that sales diminish. The idea is to increase the sales price to increase profit, but without passing the point of diminishing returns.

Economist Christopher Frenze wrote:

  • Three main conclusions follow from the data. First, capital gains realizations and revenues are highly responsive to changes in the tax rate. When this sensitivity is ignored or understated by official revenue analysis, huge errors have resulted, as in the previous capital gains debate. Second, there is no evidence from the actual historical data demonstrating that capital gains tax rate reduction would reduce revenues. Third, on the basis of the historical data on capital gains realizations and revenues, it would be reasonable to expect higher revenues to follow a reduction of the capital gains tax rate. [1]

Stephen Moore concludes that:

  • Tax revenues have surged when the capital gains rate has been cut as trillions of dollars of locked-in capital are released to be put to more productive uses.[1]

Notes

  1. 1.0 1.1 "A capital gain is the difference between the price received from selling an asset and the price paid for it. An asset can be a home, a farm, a ranch, a family business, or a work of art, for instance." Capital Gains Taxes: The Concise Encyclopedia of Economics - Library of Economics and Liberty

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