USA Capital Gains Tax - Axing The Taxes … A Necessity..!!

August 10, 2004
Tomas Harnin

A capital gain is income derived from the sale of an investment. A capital investment can be a home, a farm, a ranch, a family business, or a work of art, for instance. In most years slightly less than half of taxable capital gains are realized on the sale of corporate stock. The capital gain is the difference between the money received from selling the asset and the price paid for it. Tax levied on such is capital gains and there has been a long drawn controversy about the USA capital gains tax.

The capital gains tax in USA is different from almost all other forms of federal taxation in that it is a voluntary tax. Since the tax is paid only when an asset is sold, taxpayers can legally avoid payment by holding on to their assets--a phenomenon known as the "lock-in effect." Today there is an estimated $7.5 trillion in unrealized capital gains that have not been taxed. Over the past 40 years the appreciation of capital assets has outpaced realized capital gains 40-fold. That suggests that a capital gains tax reduction has the potential of "unlocking" hundreds of billions of dollars of stored up wealth.

Members of the House Ways and Means Committee see a reduction in the taxation of capital gains as providing potential benefits to all individuals, not just the wealthy. They insightfully recognize that economic growth benefits every American. Cutting the taxes on capital gains reduces a disincentive for capital formation. More capital formation will promote greater corporate expansion, which, in turn, will provide ever-improving opportunities for families.

The taxation of capital gains upon sale encourages investors who have accrued past gains to keep their money "locked-in" to such investments even when better opportunities present themselves. Reducing the rate of taxation on capital gain, will encourage investors to unlock many of these gains and, in turn, permit more money to flow into new, highly valued uses in the economy. When money can flow freely, with minimal tax impact, the efficiency of the capital markets is improved.