Capital Gains Tax Continues to Roil Economic Debate on Anniversary of Bush Tax Cut

May 27, 2008

Tomorrow, May 28, 2008, is the fifth anniversary of the second round of Bush tax cuts to personal income, known officially as the Jobs and Growth Tax Relief and Reconciliation Act of 2003 (JGTRRA).

Impatient with the economic stagnation that followed the enactment of the first Bush tax cut two years earlier, the Republican congress pushed JGTRRA through during the spring of 2003 to accelerate the tax rate cuts that were scheduled to occur in dribs and drabs over the next several years. JGTRRA also cut the tax rate on long-term capital gains from 20 percent to 15 percent. The Tax Foundation has expanded its historical table of capital gains tax rates, back in time to 1988 and forward into the future, when the current rate is scheduled to expire in 2011.

The 2003 tax cut for capital gains was JGTRRA'a most controversial provision for two reasons.

First is the Democratic Party theme that capital gains should be taxed at least as heavily as wages, and second is the Republican Party theme that cutting capital gains taxes invariably raises revenue.

On the Democratic side, neither Obama nor Clinton is living up to the high-tax party rhetoric. Both would raise the capital gains tax rate, but neither would raise it to the level of wage tax rates. Obama would raise the capital gains tax from 15 to 28 percent, Clinton from 15 to 20 percent. To date, neither has been asked to explain why they propose to preserve a preferential rate for capital gains over wages.

On the Republican side, McCain supports the current rate of 15 percent and has made no particular claim about the revenue-raising potential of raising or lowering it. To date, he has not been asked to explain the populist Republican claim that cutting the capital gains tax rat always raises revenue.

Because the 2003 tax cut did apparently goose the economy substantially, with tax revenue soaring from all sources including capital gains tax, Charlie Gibson made this revenue-raising claim the basis of one of his questions during a presidential debate in April. He stumped Obama with that question, a sign of the candidate's short tenure in Washington where almost every Democrat has memorized a response to the "tax cuts pay for themselves" question.

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