Question

Explain why a reduction in the tax rate on capital gains realizations could increase the revenue from the tax in the first year the lower tax rate is in effect and decrease the revenue from the tax for the next several years.

Answer 1

A reduction in the tax rate on capital gains would reduce economic distortions and encourage investment in new enterprises and increasing the tax revenue by raising realization of gains more than enough to offset the rate reduction. The taxation of income from other sources at a higher rate in comparison to long-term capital gains gives incentives for individuals to choose investment assets on the basis of minimizing taxes and diverting their income to capital gains form