September 25, 2006
NY Sun Op-Ed cites study on taxing capital gains
Ten years ago, the legacy of double-digit inflation and real asset depreciation during the 1970s and early 1980s cast a big shadow on the economy, and several studies showed the enormous impact of applying the capital gains tax to inflationary gains. In a remarkable 1995 study for the Tax Foundation, Arthur P. Hall found that the effective tax rate on real capital gains was consistently far higher than the then-statutory rate of 28%, indeed consistently higher than 100%.
Ultimately, the capital gains tax relief that was included in the Tax Relief Act of 1997 took the form of a rate cut, from 28% to 20%, subsequently reduced to 15% in 2003, but the tax on inflation was left in place. Though the lower tax rate somewhat limits the bite of the tax on inflationary gains, it does not alleviate the tax's fundamental unfairness, nor provide protection against the re-emergence of more rapid inflation.
