Capital Gains on Personal Income Tax
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The paper outlines the history of capital gains tax in the United States and relates that some argue that further reduction in the rate of taxation on capital gains can actually increase tax revenue. The paper looks at the Tax Reform Act of 1986 (TRA86), the landmark in US capital gains tax policy, and the Taxpayer Relief Act of 1997 to explain how today's capital gains taxes work. The paper argues that capital gains are not tax breaks for the wealthy, but constitute a large part of federal and state budgets, so many people benefit from selling assets as they please. The author of the paper believes that a lower rate will stimulate sales and create opportunities for more entrepreneurial Americans to compete in the economy.
From the Paper:"A landmark in US capital gains tax policy was the Tax Reform Act of 1986 (TRA86), implemented in 1987. Ronald Reagan and the Republican legislature passed it in response to the "horizontal" inequities since liberalizations in capital income taxes in 1954 and epitomized in the Economic Tax Recovery Act of 1981. In Reagan's 1984 State of the Union address, he argued that "Whether government borrows or increases taxes, it will be taking the same amount of money from the private sector, and, either way, that's too much." The resulting Treasury Proposal outlined a plan to reduce taxes by broadening the base and thus reducing the rate on capital gains. The base was to be broadened by using marginal effective tax rate based on capital cost, so capital gains were rated equal to other income, but never above 28 percent. This plan was derived from the work of Dale Jorgensen and Alan Auerbach in 1979. Tax policy on capital gains was further studied by Jorgensen and Kun-Young Yun for a 1987 Uppsala University Conference. Comparative international capital tax policy was pioneered by Mervyn King and Don Fullerton's 1984 book, which influenced the World Bank's approach to developing countries, several of which implemented TRA86 policies of their own."
Sample of Sources Used:
- Auerbach, Alan J. 1983. The taxation of capital income. Cambridge, MA: Harvard University Press.
- Burman: Leonard E. 1999. The labyrinth of capital gains tax policy: a guide for the perplexed. Washington, D.C.: Brookings Institution Press.
- Internal Revenue Service. 2010. http://www.irs.gov/ Accessed 2 Nov 2010.
- Jorgensen, Dale W., Landau, Ralph, ed. 1993. Tax reform and the cost of capital: an international comparison. Washington, D.C.: Brookings Institution Press.
- King, Mervyn A., and Fullerton, Don. 1984. The taxation of income from capital: a comparative study of the United States, the United Kingdom, Sweden, and West Germany. Chicago: The University of Chicago Press.
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