Capital Gains Tax Cuts – The Key to Economic Stimulus

Even before the tragedies of September 11, the economy was sputtering. GDP grew by just 0.2 percent last quarter, leaving America on the brink of a recession. The vast effects of the attacks could exacerbate the economic slowdown by devastating the airline and insurance industries, and causing American markets to be less attractive to foreign investors. Given the new and unpredictable strains the economy will face, it is essential for Congress to a pass pro-growth economic stimulus package.

What kind of stimulus package should we pass?

Generally, the best way to stimulate the economy is by putting more money in the private sector. This is often done by cutting taxes, as was the case with President Bush’s recent tax relief package. Significantly cutting capital gains tax rates, or eliminating this tax altogether, should be an integral part of any stimulus package.

What are capital gains taxes?

Capital gains taxes are collected when an asset is sold for a profit. This applies to the sale of stocks, real estate, or other property, such as a piece of artwork. These gains are taxed at a maximum rate of 20 percent for individuals on assets held for 12 months or longer. In addition to the federal tax, most states collect their own capital gains taxes. The average state capital gains tax rate is 4.6 percent.

Are American capital gains taxes high?

Yes. In a recent survey, the average capital gains tax rate of 24 industrialized countries was 14.5 percent. The rate in the U.S. is 38 percent higher than this international average!

Why should we reduce capital gains taxes?

Reducing the capital gains tax rates would ease the disincentive that the current tax code places on saving and investment. This could help increase our abysmal personal savings rate, which Alan Greenspan has suggested is a major cause of our economic woes. Increased investment would free up capital for entrepreneurship and risk-taking. This could lead to significant economic expansion and the creation of many new jobs.

Can we afford another tax cut?

Yes. In fact, a capital gains tax cut could potentially increase revenues to the government. When Congress cut capital gains taxes in 1997, capital gains revenues doubled in three years. More importantly, a capital gains tax cut could help us avoid a prolonged economic downturn. One thing America cannot afford is a recession – especially if we are engaged in a war.

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