Capital Gains Tax Repeal – Will It Stay Or Will It Go?

The Past, Present, And Future Of The Tax

August 21, 2004
By Niles Brohey

Profits made from the sale or exchange of capital assets are taxed separately form income. The tax on these profits is called capital gains tax. At present capital gains tax provides approximately 3% of total United States government revenue making it the 4th largest single government income source. Despite this it is highly controversial and the source of much debate, both in private and public circles and has been for a long time. The center of the debate lies in whether or not capital gains can be considered income, repeal of the capital gains tax is always an contentious issue.

In 1872 the US supreme court ruled that capital gains were not income and as such the capital gains tax was illegal. This ruling was reversed almost 50 years later making the tax legal again and yet the capital gains tax repeal is still sought by many in America today.

The last significant move at capital gains tax reform was in 1997 when reforms that lowered all federal capital gains tax rates were instituted, this came as a compromise after President Clinton vetoed moves by republicans to significantly reduce or wholly repeal the tax in 1995. Of course opinions on capital gains tax reform are split between the two main parties, traditionally those in favor of reform are conservative republicans, whereas proponents of the tax come from a more liberal democrat idealogical base.

One of the main arguments against repealing the capital gains tax is that the federal government will lose a large amount of its income – studies have put the possible loss in income at $90m. However those in favor of repeal believe that the tax is a block to a more efficient economy and repeal would generate more economic activity countering and possible losses.

Despite the fact that capital gains tax reform and repeal have long been a cause of the Republican party we are unlikely to see a full repeal of the tax within a short time frame. Much more likely are continuing cuts in the top rates of tax and possibly revision of the required holding times for long term assets.