Capital Gains Taxation in the United States : Realizations , Revenue , and Rhetoric

IN 1985, individuals filing U.S. tax returns reported $166.4 billion of long-term capital gains in excess of short-term capital losses.' The following year Congress enacted a significant increase in capital gains taxes effective in 1987, and capital gains realizations for 1986 nearly doubled, to $324.8 billion.2 That investors' expectations of tax changes would alter their realization practices markedly comes as no surprise. How changing rates would affect tax revenues and realizations in the longer run is not as obvious. Largely as a result of the capital gains tax increase of 1986, the U.S. presidential campaign of 1988 saw an intensification of a continuing debate over capital gains taxes. Proponents of reducing capital gains tax rates argue that lower rates would reduce economic distortions and encourage investment in new enterprises while raising tax revenue by increasing realization of gains more than enough to offset the rate reduction. Opponents of cutting capital gains tax rates believe it would