President Bush's investment tax cuts helped stimulate the economy and increase government revenue, and raising the capital gains tax rate, as some are now proposing, would be harmful to the economy at a time when it is once again in need of stimulus, according to a new study from the National Center for Policy Analysis (NCPA).
"Some policy makers want to nearly double the tax on capital gains," warned Stephen Moore, member of the editorial board of the Wall Street Journal and author of the study. "That is the exact opposite of what our economy needs. If anything, the rate should be cut further."
Faced with a fragile economy early in his presidency, President Bush responded with a series of tax cuts, including reduced taxes on capital gains and dividend income. These measures were designed to stimulate capital investment and produce more jobs. The study notes that the stimulus package had positive effects on the economy and government finances. The economy grew, the government gained revenue and the rich now pay a larger share of taxes than ever. For example:
- The rate of business capital investment underwent a U-turn – from negative business investment spending in the two years before the tax cut to an average annual increase of more than 10 percent in the three succeeding years.
- In the four years since the cut, federal revenues increased $740 billion and revenues from the capital gains tax nearly doubled to $110 billion.
- There was a sizable "unlocking effect" from the lower tax rate, meaning that investors voluntarily sold stock and other assets at a much higher volume once the tax rate was reduced, nearly doubling the amount of capital gains realized.
The study notes that the cuts are scheduled to expire after 2010, increasing the capital gains tax from 15 percent to 20 percent, which is higher than most developed countries. Some have suggested raising the rate to 28 percent, higher than the rate when Bill Clinton left office and placing the U.S. at a competitive disadvantage
"Increasing the capital gains tax rate would have a negative effect on the economy in both the short and long term," said Moore . "It is critical that Congress extend the life of these cuts by making them permanent. And they need to do it sooner, rather than later to help boost the economy and reduce the growth-dampening effects of uncertainty."