Capital Gains Tax Rates and Revenues

Capital Gains Tax Rates and Revenues
Gregg A. Esenwein
Specialist in Public Finance
Government and Finance Division
Summary
The taxation of individual capital gains income is a perennial topic of debate in
Congress. Taxes on long-term capital gains income were reduced in 1997 and again in
2003. The holding period to qualify for long-term capital gains treatment was reduced
in 1998. This report provides historical information on the holding period, maximum
statutory tax rate, and revenues from the taxation of individual capital gains income.
This report will be updated as legislative action warrants or as new data become
available.
Since the enactment of the individual income tax in 1913, the appropriate taxation
of capital gains income has been a perennial topic of debate in Congress. Almost
immediately upon enactment, legislative steps were initiated to change and modify the
tax treatment of capital gains and losses. Since 1913, at least twenty major legislative
changes and countless minor changes have been enacted. Capital gains tax rates were last
reduced in 2003 while the holding period to qualify for long-term capital gains treatment
was reduced in 1998.¹
In May 2003, the 108^th Congress passed the Jobs and Growth Tax Relief
Reconciliation Act of 2003. Under this act, the maximum tax rate on long-term capital
gains income was reduced to 5% (0% for tax years after 2007) for taxpayers in the 10%
and 15% marginal income tax brackets. The maximum capital gains tax rate was reduced
to 15% for taxpayers in marginal income tax brackets exceeding 15%. The act also
repealed the special capital gains tax rates for assets held five years or longer. These
changes were originally effective for assets sold or exchanged on or after May 6, 2003,
and before January 1, 2009. The Tax Increase Prevention and Reconciliation Act of 2005
extended these lower rates through December 31, 2010.

¹ See CRS Report 98-473, Individual Capital Gains Income: Legislative History, by Gregg A.
Esenwein.

Under current income tax law, a capital gain or loss is the result of a sale or exchange
of a capital asset. If the asset is sold for a higher price than its acquisition price, then the
sale produces a capital gain. If the asset is sold for a lower price than its acquisition price,
then the sale produces a capital loss.
Capital assets held longer than 12 months are considered long-term assets while
assets held 12 months or less are considered short-term assets. Capital gains on short-
term assets are taxed at regular income tax rates. Gains on long-term assets are taxed at
a maximum tax rate of 15%.
Ideally, a tax consistent with a theoretically correct measure of income would be
assessed on real (inflation-adjusted) income when that income accrues to the taxpayer.
Conversely, real losses would be deducted as they accrue to the taxpayer. In addition,
under an ideal comprehensive income tax any untaxed real appreciation in the value of
capital assets given as gifts or bequests would be subject to tax at the time of transfer.²
Obviously, the current law tax treatment of capital gains income varies considerably
from the ideal treatment under a comprehensive income tax. One response to this
deviation from a comprehensive approach to the taxation of capital gains income has been
a call for further reductions in the tax rates applicable to capital gains income.
One argument for lowering capital gains taxes has focused on the benefits of
reducing “lock-in” effects. Lock-in occurs because the income tax liability on capital
gains income can be deferred until the asset is sold. Tax deferral creates a bias because
individuals faced with a large lump-sum tax are reluctant to sell their capital assets even
though, on a pre-tax basis, they could earn a higher rate of return on an alternative
investment. This “lock-in” effect tends to retard the efficient allocation of resources in
the economy with tax considerations tending, in some cases, to dominate other market
forces. Proponents of capital gains tax reductions argue that cutting capital gains taxes
will reduce “lock-in” effects and free up resources, increase savings and stimulate
economic growth, and make the tax code less complex. Critics are concerned about the
distributional effects, possible tax shelter abuses, and the revenue losses associated with
reductions in capital gains taxes.
Some commentators argue that reducing taxes on long-term capital gains will not
reduce federal revenue but will, in fact, result in increased revenue. It is argued that as
taxes are reduced on capital gains, “lock-in” is reduced, which increases realizations and
investments in capital assets. The net effect is to increase federal revenues.
Although taxes on increased capital gains realizations would offset some of the
initial cost of cutting capital gains taxes, there is considerable uncertainty about the
magnitude of the unlocking effects. It appears that over the long-run, the revenue
generated from an increase in capital gains realizations accompanying a tax cut would not
be large enough to offset the static revenue loss from the tax cut itself. A net revenue gain
is also less likely under current law than it was in the past, in part because the increase in
realizations would be taxed at lower rates than would have been the case in the past.

² For more information see CRS Report 96-769, Capital Gains Taxes: An Overview, by Jane G.
Gravelle.

The following two tables present background information that may prove helpful to
policy makers as they debate the merits of further capital gains tax changes in the 110^th
Congress. Table 1 shows the statutory maximum tax rates on both ordinary income and
long-term capital gains income since the adoption of the federal individual income tax in
1913. This table also shows the holding period required for capital assets to qualify for
long-term capital gains tax treatment.
Two major observations can be drawn from the data in Table 1. The first item is
that with the exception of the first nine years, the maximum statutory tax rate on long-
term capital gains has been substantially lower than the maximum statutory tax rate on
other forms of income.³ The second observation is that the current maximum statutory
tax rate on long-term capital gains income is lower than it has ever been in the post World
War II time frame.
Table 2 shows realized capital gains and federal individual income taxes paid on
realized capital gains for selected years 1955 through 2002. It also shows CBO estimates
of realized capital gains and taxes paid on capital gains for 2003 through 2016.

³ The effective marginal tax rate (the tax rate that a taxpayer actually faces) on both ordinary
income and long-term capital gains income can be higher than the statutory tax rate because of
the interaction of various other provisions in the tax code.

Table 1. Statutory Marginal Tax Rates
on Long-Term Capital Gains Income
^(1913-²⁰¹⁰⁾
^M^a^xⁱ^mu^{m T}^a^x^R^a^t^e^oⁿ^M^a^xⁱ^m^u^m^S^t^atu^t^{ory T}^a^x^H^o^lding^Perio^d^f^o^r^Lo^ng^-^t^erm^Ca^pit^a^l
^Yea^r^O^r^dina^ry^Inco^m^e^{Rate on}^L^oⁿ^g^-term^Capⁱ^tal^G^a^ins^T^reatm^ent
^(%)^Ga^{ins Inc}^o^m^e⁽^%⁾^(years⁾
^1913-²¹^{7 -}⁷⁷^{7 -}⁷⁷^—
^1922-³³^{24 -}⁷³^12.5²
^1934-³⁷^{63 -}⁷⁹^{18.9 -}^23.7¹
^1938-⁴¹^{79 -}^81.1¹⁵¹^.5
^1942-⁵¹^{82 -}⁹⁴²⁵^0.5
^1952-⁵³⁹²²⁶^0.5
^1954-⁶³⁹¹²⁵^0.5
^1964-⁶⁷^{70 -}⁷⁷²⁵^0.5
¹⁹⁶⁸^75.3^26.9⁰^.5
¹⁹⁶⁹⁷⁷^27.5⁰^.5
¹⁹⁷⁰^71.8^30.2⁰^.5
¹⁹⁷¹⁷⁰^32.5⁰^.5
^1972-⁷⁵⁷⁰³⁵^0.5
¹⁹⁷⁶⁷⁰³⁵^0.5
¹⁹⁷⁷⁷⁰³⁵^0.75
¹⁹⁷⁸⁷⁰^33.8¹
^1979-⁸⁰⁷⁰²⁸¹
¹⁹⁸¹⁷⁰²⁰¹
^1982-⁸³⁵⁰²⁰¹
^1984-⁸⁶⁵⁰²⁰^0.5
¹⁹⁸⁷³⁸²⁸¹
^1988-⁹⁰²⁸²⁸¹
^1991-⁹²³¹²⁸¹
^1993-⁹⁶^39.6²⁸¹
¹⁹⁹⁷^39.6²⁰¹^.5
^1998-⁹⁹^39.6²⁰¹
²⁰⁰⁰^39.6²⁰¹
²⁰⁰¹^39.1²⁰¹
^{2002 -}²⁰⁰³^38.6²⁰¹
^{2003 (May}^)-
^t^h^r^o^ugh^35.0¹⁵¹
²⁰¹⁰
^S^o^u^rce:^S^t^a^tⁱ^s^tⁱ^c^s^f^o^r¹⁹¹³^t^h^r^o^u^g^h^1999,^The^Laby^rⁱ^{nth of C}^{apital G}^a^ins^Tax^Polic^y^{, by}^L^e^ona^r^d^{E. B}^u^r^m^aⁿ^.
^Brook^ing^s^Ins^{titution P}^r^e^s^s^,^W^a^s^h^ing^t^{on, D}^.^{C. 1999. Sta}^tis^tic^s^f^o^{r 2000 throug}^{h 2003, CRS.}

Table 2. Realized Capital Gains and Taxes Paid on Capital Gains
⁽^b^illioⁿ^s^o^f^d^o^llar^s⁾
^Realized^Ta^xe^{s P}^a^id^Ma^xⁱ^m^u^m^St^a^t^ut^o^r^y
^Yea^r^Ca^pita^l^on^T^a^x^{Rate (%) on}
^Gaⁱⁿ^s^Ca^pit^a^{l G}^a^ins^L^o^ng-term^G^a^ins
¹⁹⁵⁵^9.9¹^.5^25.0
¹⁹⁶⁰^11.7¹^.7^25.0
¹⁹⁶⁵^21.5³^.0^25.0
¹⁹⁷⁰^20.8³^.2^30.2
¹⁹⁷⁵^30.9⁴^.5^35.0
¹⁹⁸⁰^74.1^12.5^28.0
¹⁹⁸⁵^172.0^26.5^20.0
¹⁹⁹⁰^123.8^27.8^28.0
¹⁹⁹⁵^180.1^44.3^28.0
¹⁹⁹⁶^260.7^66.4^28.0
¹⁹⁹⁷^364.8^79.3^20.0
¹⁹⁹⁸^455.2^89.0^20.0
¹⁹⁹⁹^552.6^112.0^20.0
²⁰⁰⁰^644.0^127.0^20.0
²⁰⁰¹^349.0^66.0^20.0
²⁰⁰²^269.0^49.0^20.0
²⁰⁰³^323.0^51.0^15.0
²⁰⁰⁴^499.0^72.0^15.0
²⁰⁰⁵^643.0^97.0^15.0
²⁰⁰⁶^729.0^110.0^15.0
²⁰⁰⁷^708.0^107.0^15.0
²⁰⁰⁸^699.0^102.0^15.0
²⁰⁰⁹^698.0^102.0^15.0
²⁰¹⁰^796.0^116.0^15.0
²⁰¹¹^547.0^103.0^20.0
²⁰¹²^649.0^123.0^20.0
²⁰¹³^661.0^125.0^20.0
²⁰¹⁴^676.0^127.0^20.0
²⁰¹⁵^694.0^130.0^20.0
²⁰¹⁶^715.0^133.0^20.0
^S^o^u^rce:^D^e^pa^r^t^m^e^{nt of}^the^T^r^e^a^s^ur^y^f^o^r^y^e^a^r^s^{1955 -}^{2002. C}^B^O^f^o^r^2003-^{2015 f}^r^om^The^Budge^t^{and E}^c^onom^ic
^O^u^tlook^:^Fis^c^{al Ye}^ar^s^{2008 -}²⁰¹⁷^{, J}^a^nua^r^y^2007.