Who Benefits from Capital Gains Tax Reductions?

Abstract

This paper examines the distribution of the benefits associated with reductions in capital gains taxes. Plans which reduce capital gains taxes by excluding a fixed fraction of capital gains from taxable income, by taxing real rather than nominal gains, and by using a sliding scale capital gains exclusion are considered. We reach three main conclusions. 1. Using plausible measures of economic status, capital gains receipts are highly concentrated among those with high incomes. The richest 2 percent of Americans receive more than 50 percent of all capital gains. Claims that capital gains recipients only appear to be rich because their capital gains income is transitory are not supported by longitudinal data. Likewise, claims that a large fraction of the benefits from capital gains tax reductions flow to middle income taxpayers result from failing to consider tax shelters. Capital gains on corporate stocks are considerably more concentrated among high income individuals than capital gains on other assets. 2. There are important differences in the distributional consequences of different approaches to reducing capital gains taxes. Indexation yields greater benefits to lower income taxpayers than a general capital gains exclusion because they typically hold assets longer before selling them, and because they typically enjoy smaller gains than higher income taxpayers. Indexation also favors real estate over corporate stocks to a much greater extent than does a general exclusion. A sliding scale capital gains tax cut, based on the amount of time an asset is held has distributional consequences very similar to a general exclusion. 3. Most capital gains are realized on assets that were held for 10 or more years. Reductions in capital gains taxes would, for many years, benefit primarily assets that are already in place. Confining capital gains relief to future gains would substantially reduce the revenue cost of capital gains reform.