The Single Income Tax - The 2020 Tax Commission

But that argument that a higher CGT would be fairer ignores that it is effectively
a double tax (Section 5.2.2.1) and is also hard to sustain if the tax reduces revenue.
The Republican Study Committee reports similar findings to the Adam Smith
Institute:446
In 1977, the top capital gains tax rate was 35 per cent. After five changes
between 1978 and 2003, four that lowered the capital gains rate, the top
capital gains tax rate is currently 15 per cent. This 57 per cent reduction in
the top capital gains tax rate over the last thirty years has coincided with
a fifteen-fold increase in capital gains revenue. From 1977 to 2007, capital
gains revenue increased from $8 billion to $127 billion.
In 1987, Lindsey looked at a proposed increase in the rate of CGT in the United
States. He found that the change could lead to a long term and substantial reduction
in CGT revenue, and that as a result the measure would be regressive.447
The obvious objection to these findings is that, while a rise in CGT rates reduces
CGT revenue, it increases Income Tax revenue. Investors will put less effort into
shifting income into capital gains in order to avoid tax. However more comprehensive
research suggests that, even with a broader set of potential behavioural changes
accounted for, a cut in CGT may still increase revenue.
Table 4.7: Fiscal effects of changes in the Capital Gains Tax rate, Entin
Federal budget
Changes to revenue and budget
effects of changes in the capital gains
tax rate ($bn)
20% 24% 28%
Static capital gain tax increase 30.7 54.7 77.5
Loss in personal income tax from weaker economy -28.3 -51.8 -73.5
Net change in personal income tax 2.5 2.9 4.0
Loss in other taxes from weaker economy -15.3 -27.7 -39.0
Dynamic change in total federal revenue (before portfolio
adjustments)
-12.8 -24.8 -35.0
Change in federal outlays due to lower wages -7.4 -13.4 -18.8
Change in federal budget surplus (- indicates smaller
surplus or larger deficit)
Portfolio adjustment
Further reduction in capital gains tax revenue from
reduction in capital stock
-5.4 -11.4 -16.2
-12.0 -21.4 -29.8
Dynamic revenue change with portfolio adjustment -24.9 -46.2 -64.8
Change in federal surplus with portfolio adjustment -17.4 -32.8 -46.0
Entin modelled the effects of raising CGT to 20 per cent, 24 per cent and 28
per cent. The first row of Table 4.7 shows that with static increases to the CGT rate,
assuming no change in capital formation and employment, revenues can indeed
446. Ibid
447. Lindsey, L, Capital Gains Taxes under the Tax Reform Act of 1986: Revenue estimates under various
assumptions, NBER Working Paper No. w2215, 1987
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