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Capital Gains Tax : To Abolish or Not?

The United States should abolish the Capital Gains Tax… or should they? Well, research and statistics tell us that although there are both pros and cons to the capital gains tax, the bad outweighs the good. Capital gains tax, or CGT, can be defined as a tax levied on profit from the sale of property or of an investment.


Let’s talk about why abolishing the CGT would be beneficial to the country…


Capital gains tax helps decrease tax revenue for the government. Joseph Minarik from the Committee of Economic Development explains that the 50 years of economic history show that CGT has backfired. Instead of raising federal revenue, it reduces it. According to J.D. Foster, a higher tax rate means a higher cost of capital. This would lead to less capital employed, which in turn, leads to less output and income, effectively bad for the country.


There is a solution, however: The Congress of the US Congressional budget office explains that lowering the capital gains tax rate to 15% would increase revenue already. Furthermore, Jim Renacci goes on to say that, “when rates were cut in 1981, 1997, and 2003, revenues on investment income increased from 15 percent to 25 percent in the three year periods following the cuts.” This shows that if such a small decrease in CGT can create that much of an effect, abolishing the tax as a whole, can create an even larger, and more beneficial impact on the United States.


Furthermore, capital gains tax is said to impose otherwise unnecessary costs on the economy in many ways. Firstly, CGT reduces money within the economy by taking it out of circulation. Instead, it places this money in private areas and government budgets. This can lead to two separate negative effects. Firstly, as Rea Hederman explains, “The slower economy will cause employment to shrink by 413,000 in 2018.” In addition, higher taxes on capital can and will hinder the growth of investment and capital shock. “The decrease in capital will reduce economic growth, which will lead to higher unemployment and reduced personal income.” However, according to Robert A. Green, a solution to boost our economy would be to abolish the capital gains tax, which will bring economic growth. This is because companies will invest their tax savings in job creation and wage hikes within the US.


Moreover, Jason Clems finds that capital gains taxes make capital investments more expensive, and therefore, less investment occurs. This “thereby distort[s] decision making by individuals and businesses.” This, in turn, can lead to multiple cons. The F.Institute writes that capital gains taxes reducing returns on investments can have a substantial impact on the reallocation of capital, the available stock of capital, and the level of entrepreneurship. It can also create the lock-in effect. Fraser Institute explains that the tax is only imposed when an investor sells his or her investment from the market and realizes the capital gain. This incentivises investors to simply leave their capital locked in the market, even if productive opportunities are available. Economists refer to this as the “lock-in” effect. “Capital that is locked into suboptimal investments and not reallocated to more profitable opportunities hinders economic output.” Fraser Institute elaborates on this: by triggering market responses such as the lock-in effect, CGT creates more obstacles for investment activities. CGT makes capital investments more expensive and thus, going back to the original claim, less investment occurs.


Investments are crucial for a healthy economy because as Whalen says, “It provides the money companies need to grow, expand, and hire people.”


Thus, by abolishing capital gains tax, investment will increase and promote positive effects for our economy.


Ultimately, capital gains tax will have a harmful influence on the United States economy. It negatively affects both the government and citizens of the United States which is not in the States’ best interest.

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