The tax bill passed by the House in April slashes the tax rate on capital gains from 28 percent to 19.8 percent and indexes future gains against inflation. Ironically, such a reform, if enacted into law, would repeal a Reagan-era tax increase. It would also bring the United States into accord with most other industrial nations, which either have no capital gains tax on long-term holdings (Germany, Belgium, Hong Kong, the Netherlands), or lower rates (France, Italy, Japan, Sweden), or which index for inflation (Australia, United Kingdom).
The economic argument for cutting--or eliminating--the tax is fairly straightforward: The capital gains tax punishes people for investing wisely, whether in a house, stock, or business. Cutting the tax, then, would reduce a drag on saving and investing throughout the economy.
Opponents of a rate cut argue that it would benefit only the wealthiest Americans, who have more capital invested in the first place. There's no doubt that the "wealthy" would benefit from a cut. For instance, between 1942 and 1992, people making over $500,000 (about 1 percent of the population) had 31.7 percent of total taxable capital gains. But the effects of a capital gains tax would benefit income earners at every level--as the data below show.