The Congressional Research Service has put out a small report on capital gains taxation, Capital Gains Tax Rates and Revenues (Apr. 4, 2007), available in BNA Tax Core. It provides a useful chart with a comparison of ordinary income tax rates and capital gains rates since 1913 and another that looks at capital gain revenues and taxes from 1955 through 2002 (and projected forward).
Corporate managers and owners (who are the main holders of capital assets in this country) are stepping up the arguments for corporate capital tax rate cuts (see the earlier A Taxing Matter posting on this issue) and individual capital gains tax rate cuts (or purported "fair taxes" that tax only consumption--see Republican bills introduced in the House H.R. 25 and Senate S. 1025). Regretably, this country already has incredibly low rates on capital gains that give a decided advantage to those whose wealth rests on their ownership of financial assets--the upper crust. As the report notes, "the current maximum statutory tax rate on long-term capital gains income is lower than it has ever been in the post World War II time frame." CRS, Capital Gains report (above).
The report considers one of the frequent arguments made by proponents of having income other than capital gains bear all the tax--that having a tax on gains "locks in" capital inefficiently by causing people to hold onto their assets til death (when they get especially preferential treatment) rather than sell the assets and invest in better assets. It's of course not so clear that assets are really locked-in because of the tax, and it is even questionable whether lock-in is a bad phenomenon, since it would help counter the senseless "day-trading" mentality that currently predominates for many investors. As the report notes, "[c]ritics are concerned about the distributional effects, possible tax shelter abuses, and the revenue losses associated with reductions in capital gains taxes." Id. I'd add an additional overreaching concern--the fact that capital gains accrue mainly to the upper crust, who get the lion's share of tax cuts when rates are reduced on capital gains income, resulting in real threats for democractic institutions.
The report considers an accompanying argument made by capital gains tax-cut proponents--the discredited Laffer notion that cutting taxes raises revenues.
It appears that over the long-run, the revenue generated from an increase in capital gains realizations accompanying a tax cut would not be large enough to offset the static revenue loss from the tax cut itself. A net revenue gain is also less likely under current law than it was in the past, in part because the increase in realizations would be taxed at lower rates than would have been the case in the past. Id.