Myth: Lowering capital gains tax rates will not help the economy.

Fact: Cutting capital gains tax rates is the single best tax policy to improve economic growth.

* Capital gains play a unique role in fostering economic activity, especially by entrepreneurs in high-technology areas.
* In fact, many economists believe that the optimal tax rate on capital gains is 0 percent.
* Because government first takes money through corporate income taxes, taxation of capital gains  represent double taxation of investment returns and should be eliminated.

Myth: If there is a capital gains tax cut, it should be temporary and it should not be available to all investors.

Fact: Only a permanent capital gains cut available to all investors – include those who invested long ago  will stimulate new investment and revive economic growth.

* A temporary cut will induce people to sell assets, but it will not stimulate new investors who will face today’s high rates again in the future after the temporary reduction has expired.
* A temporary cut will “lock-out” new investment and will hurt economic growth.
* The induced selling without incentives for new investment will further depress stock and other asset prices and will not stimulate new investment. By unlocking held assets and inducing people to sell investments, a temporary cut may increase tax revenue – it may not, though, because asset prices will be lower – but it will not help stimulate economic growth.
* A permanent cut will provide the incentives for people now to sell long-held unproductive assets and for people now and in the future to make new productive investments.

Myth: Cutting capital gains tax rates will cause stock markets to fall.

Fact: Cutting capital gains tax rates will, as it has in the past, cause asset values, including stock markets, to rise.

* Some people claim that lowering capital gains tax rates will cause the stock market to fall, because people would sell their investments. By this silly logic, if people want to increase stock market values, then there should be an increase in capital gains tax rates, because, then investors would be less willing to sell investments.
* In fact, lowering capital gains tax rates increases the prices of stocks and other assets. Stock markets reflect the collective actions of people looking forward.
* Lowering the cost of capital by decreasing tax rates on investment returns will increase asset values.
* For example, the 1997 cut in the top capital gains tax rate from 28 percent to 20 percent increased stock prices by approximately 8 percent.

Myth: Capital gains tax cuts benefit the “wealthy.”

Fact: Capital gains tax cuts improve the entire economy.

* Capital gains tax reductions stimulate economic growth, which benefits the entire country.
* Capital gains taxes disproportionately hurt the elderly, low and middle-income investors who have less discretion over the timing of their capital gains.
* Most people who report capital gains do not have high annual incomes.
* People with high incomes are most sensitive to capital gains tax rates, because they possess the most flexibility and means to avoid high tax rates. When capital gains tax rates are high, people with high incomes do not sell their assets and realize their gains.
* High-income people pay a greater percentage of capital gains taxes when capital gains tax rates are low than when capital gains tax rates are high.
* High capital gains tax rates make capital scarce. When capital is scarce it goes to safe investments. Low capital gains tax rates make capital abundant. When capital is plentiful it goes to “riskier” investments – such as inner cities and disadvantaged areas.

Myth: Lowering capital gains tax rates will not lead to more investment.

Fact: Taxpayers are very responsive to capital gains tax rates. High capital gains tax rates punish and reduce investment. Low capital gains tax rates induce more investment.

* Taxpayers have a choice over when to realize capital gains and pay taxes. High capital gains tax rates lead people not to invest and current investors to hold assets, increasing the “lock-in” effect.
* Lowering capital gains tax rates increases new investment and unlocks long-held undesirable assets, thereby increasing capital gains realizations.
* High-income taxpayers, who have great discretion over the timing of their investment decisions, are particularly responsive to changes in capital gains tax rates.

Myth: Government cannot “afford” large and permanent cut in capital gains tax rates.

Fact: Improving economic growth is the proper focus of the debate regarding capital gains tax rates, and greater economic growth increases federal tax revenue from many sources.