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Issue
Should PIA support reductions in the capital gains tax?
Status
The last significant alteration of the capital gains tax was in the Tax
Relief Act of 1997, which included a 30% cut, reducing the 15% and 28%
rates to 10% and 20%. The 20% rate is now the maximum tax on capital gains
held for a year. Assets acquired after 2000 held for 5 years are subject
to a maximum rate of 18%. Gains in the ordinary tax rate of 15% are subject
to a 10% capital gains rate for assets held for one year and 8% for gains
on assets held for 5 years and sold after 2000. There is no acquisition
requirement date to qualify for the 8% rate on a 5 year gain.
- Members
of Congress have introduced a number of proposals to reduce the capital
gains tax further, but very few changes have been implemented since
1997. In 1998, the holding period for long term gains was reduced from
18 months to one year. The 1999 tax bill would have reduced rates further,
but the bill was vetoed by President Clinton. Further reductions were
debated during consideration of the economic stimulus bills at the end
of 2001 and beginning of 2002, but nothing was included in the final
bill. Proposals that have received the most discussion include:
- Reducing
both individual and corporate rates and indexing the basis of assets
of individuals for purposes of determining gains and losses.
- Reducing
the corporate capital gains tax rate to 15 percent for assets held
more than three years.
- Taxing
the net capital gain of closely held corporations in the same manner
as individuals.
On both sides of the aisle, there are tax priorities that rise higher
than capital gains reform. And, since capital gains reform is an easy
target for the “tax break for the rich” claim, it is often the
first item dropped from tax bills in negotiations. However, because capital
gains reform is a priority for many lawmakers, it will often be on the
negotiating table when tax reform legislation is considered.
Concerns
The capital gains tax is a direct tax on capital that reduces the incentive
to save and invest. It is important that capital be available for businesses
to allow for start-up or expansion, among other things. Reducing the capital
gains rate keeps the cost of current capital down and allows money invested
in frozen assets to be released for other investments such as new equipment
or expansion. Increased business investment will result in the creation
of new job opportunities in the market place. Further, business owners
and workers will be able to invest more freely without the fear of a large
government penalty for investment success.
Position
PIA supports changes to the capital gains tax that enhance the ability
of companies to invest.
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