Policy Documents

Economic Effects of Increasing the Tax Rates on Capital Gains and Dividends

William Beach, Rea Hederman, Jr. and Guinevere Nell –
April 15, 2008

On December 31, 2010, the low tax rates on capital gains and dividends enacted in 2003 will increase to the higher level that applied prior to that year. Many economists agree that the expiration of these tax cuts will discourage investment and slow economic growth. The United States already has one of the world's highest capital gains tax rates.

This paper examines the economic effects of allowing the tax rates on long-term capital gains and dividend income to increase in 2011. Because the economy would suffer from these tax increases, Congress should act now to make permanent the existing tax rates for capital gains and dividends.

Our analysis indicates that higher tax rates on these forms of income would do serious economic harm For example:

  • The slower economy causes employment to shrink by 270,000 job in 2011 and 413,000 in 2018. Similar job losses continue for the next seven years of our model's forecast horizon of 2008 through 2018.
  • Economic output as measured by gross domestic product (GDP) after inflation would fall by $44 billion in 2011 and $50 billion in 2012 from the levels that the economy would attain without this policy change.
  • These economic effects would be vividly evident in take-home pay. Personal income after taxes would decline by $113 billion after inflation in 2011 and $133 billion after inflation in 2012 when compared, again, to levels that would likely prevail without tax rates going back up.