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50 Years of the Federal Capital Gains Tax Burden

By: Arthur P. Hall, Ph.D.

Download Special Report No. 45

Executive Summary

During each of the 50 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. years from 194 2 through 1992, almost every income group has borne some share of the federal capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. burden. On an aver age annual basis, taxpayers making under $100,000 annually (in constant 1992 dollars) have paid almost one-third of all capital gains taxes. The remaining two-thirds of the capital gains tax burden has been split almost equally between the $100,000-to-$500,000 and the over-$500,000 income groups.

Many inter-related factors influence when a taxpayer will choose to realize a capital gain. Thus, one-year snapshots of the tax burden can prove misleading. The 50-year time span analyzed here, on a decade-by-decade basis, endeavors to provide a more consistent picture of the taxpayers that pay capital gains taxes.

The capital gains tax burden reported here assumes that capital gains are each taxpayer’s marginal source of income and are, therefore, subject to each taxpayer’s marginal income tax rate (as opposed to some type of average tax rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. measure). This assumption is justified because in most cases taxpayers subject themselves to capital gains taxation only if they choose to realize capital gains. Although the capital gains tax burden was calculated each year using current-year income measures, each table and chart reflects the conversion o f all income measures (including income groups) and tax-burden measures into constant 1992 dollars, using the consumer price index.