The tax bill passed by the House in April slashes the tax rate on capital gains from 28 percent to 19.8 percent and indexes future gains against inflation. Ironically, such a reform, if enacted into law, would repeal a Reagan-era tax increase. It would also bring the United States into accord with most other industrial nations, which either have no capital gains tax on long-term holdings (Germany, Belgium, Hong Kong, the Netherlands), or lower rates (France, Italy, Japan, Sweden), or which index for inflation (Australia, United Kingdom).
The economic argument for cutting—or eliminating—the tax is fairly straightforward: The capital gains tax punishes people for investing wisely, whether in a house, stock, or business. Cutting the tax, then, would reduce a drag on saving and investing throughout the economy.
Opponents of a rate cut argue that it would benefit only the wealthiest Americans, who have more capital invested in the first place. There's no doubt that the "wealthy" would benefit from a cut. For instance, between 1942 and 1992, people making over $500,000 (about 1 percent of the population) had 31.7 percent of total taxable capital gains. But the effects of a capital gains tax would benefit income earners at every level—as the data below show.
Start your day with Reason. Get a daily brief of the most important stories and trends every weekday morning when you subscribe to Reason Roundup.