Capital Gains Tax Elimination - To Be Or Not To Be?

August 8, 2004
Tomas Harnin

One of the most controversial provisions of US government has been capital gains tax elimination. There have been efforts made by various agencies to reduce, if not eliminate taxes, on capital gains. The strong supportive statement given to the fact is reducing or eliminating capital gains would stimulate prudent investment as well as promote a reasonable expansion of construction activity in the office building industry. The result of such increased investment would be job creation, economic growth and the enhancement of America's competitiveness.

One needs to know what is capital gains tax after all and what happens by not eliminating capital gains tax?

All transactions that involve the sale or exchange of a capital asset result in either a capital gain or loss. In short, it is a tax penalty imposed on productivity, investment, and capital accumulation By taxing gain on real estate assets, the federal government discourages a range of desirable economic activities:

• the acquisition and development of commercial properties,
• lending to finance or refinance investment in those properties,
• the employment of skilled workers involved in construction, renovation and remodeling work.

Opponents of a capital gains tax cut question those advantages. They argue that a capital gains cut will

1. Provide a large tax cut for the wealthiest Americans as most capital gains taxes are paid by Americans with incomes above $200,000.
2. Have very little positive impact on the U.S. economy. Many argue that taxes do not influence investment decisions and that even if there were an unlocking effect, investors might simply consume the proceeds or shift investment from U.S. assets to foreign assets that may hold greater earnings potential.
3. Increase the budget deficit. If a capital gains tax cut reduces revenues and increases the federal budget deficit, then savings and investment in the United States might actually fall after the tax cut. That would only worsen America's reported capital shortage.

Whether capital gains tax will be eliminated or reduced to improve the economy still remains largely a debatable issue.