CTJ Analysis of Assumptions Behind Joint Committee on Taxation's Capital Gains Estimates

Joint Committee on Taxation Capital Gains Tax Cut Estimates Are Based on Highly Questionable Assumptions

July 15, 1999

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To lower the estimated cost of the 1999 House GOP tax plan's capital gains tax cut, the Joint Committee on Taxation assumed that the plan would induce stockholders to increase their capital gains realizations by 25 percent compared to what they would otherwise do. This assumption had the effect of reducing the estimated cost of the capital gains tax cut by three-fourths.

The Joint Committee assumed such a sharp projected increase in capital gains realizations in response to the tax cut despite the fact that the aftermath of the most recent capital gains tax reduction in 1997 offers no evidence to support such an assumption.

In the two years prior to the 1997 capital gains tax reduction, capital gains realizations grew by 70 percent, including a 45 percent jump in 1996 alone. This occurred, of course, in response to the strong performance of the stock market, which rose by a total of 56 percent in 1995 and 1996.
In 1997, the stock market had another strong year, surging by 30 percent. But despite the sharp reduction in the capital gains tax rate that took effect on May 5, 1997, capital gains realizations grew at only about the same rate as the stock market.
In fact, the 33 percent rise in capital gains realizations in 1997 was considerably less than the 45 percent jump in the previous year when there was no capital gains tax relief.

As Deputy Assistant Treasury Secretary and former CBO Senior Analyst Leonard E. Burman notes in his recent book on capital gains:

"Careful econometric studies find that capital gains are relatively unresponsive to statutory changes in tax rates . . . [but] a large difference between the rates on capital gains and other income gives taxpayers a strong incentive to convert other income into capital gains. . . . [This] wastes society's scarce resources by encouraging inefficient tax shelters and distorting the nature of investment."⁽¹⁾

What the Joint Committee on Taxation Assumed to Make Its Capital Gains Tax Cut Estimates So Low
Fiscal Years 2001-09, $-billions
	With No Change in Realizations				Joint Committee on Taxation Assumptions
FY	Capital Gains Realizations	Tax Now	Tax New	Tax Cut	Capital Gains Realizations	Tax Now	Tax New	Tax Cut	Assumed % increase in realizations	% of tax cut offset by increased realizations
2001	$384	$77	$58	$ –19	$487	$77	$73	$ –4	+27%	80%
2002	398	80	60	–20	491	80	74	–6	+24%	71%
2003	411	82	62	–21	509	82	76	–6	+24%	72%
2004	427	85	64	–21	531	85	80	–6	+24%	73%
2005	447	89	67	–22	556	89	83	–6	+25%	74%
2006	468	94	70	–23	584	94	88	–6	+25%	74%
2007	490	98	73	–24	614	98	92	–6	+25%	76%
2008	514	103	77	–26	646	103	97	–6	+26%	77%
2009	540	108	81	–27	680	108	102	–6	+26%	78%

Historical Data on Capital Gains Realizations
Tax Year	$-billions	Change from Prior Year	Top Capital Gains Tax Rate	Stock Market Change
1990	$124	–19%	28%	–7%
1991	111	–10%	28%	+27%
1992	127	+14%	28%	+5%
1993	152	+20%	28%	+8%
1994	153	+0%	28%	–3%
1995	180	+18%	28%	+31%
1996	261	+45%	28%	+19%
1997	348	+33%	Cut to 20% on May 5, 1997	+30%
Source: Internal Revenue Service; New York Stock Exchange Composite Index. IRS data for 1997 capital gains (released in May 1999) is preliminary.

1. Leonard E. Burman, The Labyrinth of Capital Gains Tax Policy, A Guide for the Perplexed (1999), p. 146.

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