Changes in Federal Revenues and Tax Rates on Capital Gains

A few days ago, The Congressional Budget Office published a letter on recent changes in federal revenue and the tax rates on capital gains. I have included a small quote from the letter courtesy of the Tax Prof, but you can download the full PDF letter by clicking here.

As a result of the economic downturn, CBO expects revenues from individual and corporate income taxes in 2009 to account for about 50% of total revenue, below the average of about 57% over the past five years. ... CBO expects that when complete information for the year is available, it will show that receipts from corporate income taxes fell substantially in 2009, to about 1.0% of GDP, less than half of the 2.1% of GDP in 2008. The decline stems from a sharp drop in taxable corporate profits.

In answering your questions about how the pending changes in the taxation of capital gains tax will affect revenues and behavior, it is useful to consider how the pending increase compares with previous changes. The top tax rate on most long-term gains was reduced from around 35% to 28% in 1978 and 1979, and was reduced to 20% in 1981. It was raised to 28% in 1987, reduced to 20% again in 1997, and reduced to 15% in 2003. The increase pending in 2011 is to 18% for some gains held over five years and to 20% for most other long-term gains. Thus, the pending tax change is well within the range of changes experienced in the last 30 years, and we have incorporated the impacts from those historical changes into our modeling of the effects of the upcoming law change.