Tastes Great, More Filling

Tastes Great, More Filling is a bit smug about the effects of the recent capital gains tax cut:

Well, what do you know. The latest statistics on capital gains tax collections were recently released by the Congressional Budget Office, and receipts are not down but way up. By 45% to be exact. As part of President Bush's 2003 investment tax cut package, the capital gains tax rate was reduced to 15% from 20%. Opponents predicted, as ever, that this would reduce tax revenue.

Not even close. Here's what actually happened. This 25% reduction in the tax penalty on stock and other asset sales triggered a doubling of capital gains realizations, to $539 billion in 2005 from $269 billion in 2002. One influence was the increase in stock values over that time, thanks in part to the higher after-tax return on capital induced by the tax cuts.

But another cause for the windfall was almost certainly the "unlocking" effect from investors selling their existing asset holdings in order to realize some of their profits and pay taxes at the lower rate. They could then turn around and buy new assets, hoping for higher rates of return. This "unlocking" promotes the efficiency of capital markets by redirecting investment into new and higher value-added companies.