Advantages & Disadvantages Of Capital Gains Tax Cut

One of the most unfair features of the capital gains tax is that it taxes gains that may be attributable only to price changes, not real gains. Different analysts give different views regarding Capital Gains Tax Cut. Let us analyse both step wise.

Arguments for the motion:

1. A cut would increase investment, output, and real wages. If the tax on the return from capital investments--such as stock purchases, new business start-ups, and new plant and equipment for existing firms--is reduced, more of those types of investments will be made. Those risk-taking activities and investments are the key to generating productivity improvements, real capital formation, increased national output, and higher living standards.

2. A cut would liberate locked-up capital for new investment. For those already holding investment capital, a capital gains tax reduction might create an "unlocking effect": individuals would sell assets that have accumulated in value and shift their portfolio holdings to assets with higher long-run earning potential. The unlocking effect might have strong positive economic benefits as well: the tax cut would prompt investors to shift their funds to activities and assets--such as new firms in the rapid-growth, high-technology industry--offering the highest rate of return.

3. A cut would produce more tax revenue for the government. If a capital gains tax cut increases economic growth and spurs an unlocking of unrealized capital gains, then a lower capital gains rate will actually increase tax collections.

4. A cut would eliminate the unfairness of taxing capital gains due to inflation. A large share of the capital gains that are taxed is not real gains but inflationary gains. The government should not tax inflation.

Arguments against the motion:

1. Provide a large tax cut for the wealthiest citizens.

2. Have very little positive impact on the economy. Many argue that taxes do not influence investment decisions and that even if there were an unlocking effect.

3. Increase the budget deficit. If a capital gains tax cut reduces revenues and increases the budget deficit, then savings and investment might actually fall after the tax cut. That would only worsen reported capital shortage.