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Tax revenue is a vital part of the United States government. The income generated from taxes allows the government to finance public works programs, build infrastructure and maintain a military. When the government needs to raise more revenue it generally raises the tax rate to create more income. The idea of raising taxes to raise revenue generally works; however, history has show that more revenue is not gained from the capital gains tax. When the capital gains tax rate rises there is less revenue generated, investment capital decreases, and the economy slows.

The capital gains tax is a tax charged to the profit realized from the sale of an asset that was purchased at a lower price. Capital gains are commonly realized from the sale of stocks, bonds and property. A capital gain is treated as an income and like any income, it is taxed. Under current United States tax code there are two different types of capital gains, short term and long-term gains. A short-term gain is considered to be the purchase and sale of an asset for a gain in less than one year. Long-term capital gain requires a year or more between the purchase of an asset and the sale of the asset for a gain. Short-term capital gains are taxed at the ordinary income tax level of the investor, however; long-term capital gains are taxed differently. Currently investors in the 10% to 15% income tax range pay no long term-capital gains tax and everyone else pays a 15% tax on capital gains. (Beach, Hederman & Guinevera, 2008)

Economic growth in America is important and relies on the input of two factors: input of capital and labor, and the productivity of the inputs. For the economy to grow capital and labor in the market must increase or a more efficient way to produce products is found, or both situations occur. The need to invest in capital is directly related to the growth of the economy by increasing the amount of capital available in the economy and by enhancing labor productivity.  Labor productivity can be directly complemented capital in the economy for investment in more productive operations. (The Economic Effects of Capital Gains Taxation, 1997)

When capital gain tax rates raise the return on an investment is lowered and the cost to acquire capital increases.  When the return on investment is lower there is less investment and the amount of available capital in the economy decreases. The inverse to an increase in the capital gains tax would be a decrease to the capital gains tax. A decrease in the capital gains tax rate is believed to stimulate investing and the amount of capital in the economy by producing more profitable and successful businesses, because they are able to acquire the funds required to under go new potential income projects.  The trickledown effect would produce higher wages, raising the standard of living and create jobs. (Throning, 1995)

A recent study was conducted by DRI/McGraw-Hill it was estimated that the reducing individuals long-term capital gains taxes by 50% and corporations capital gains tax by 25% the level of business spending would have been billion dollars higher than it was in 2007 creating the GDP of America to be roughly 0.4 percent higher. The conclusion of the study notes “the evidence suggests to almost all economists that a capital gains cut is good for the economy and roughly neutral for tax collections.”(Jorgenson, Dale, Yun & Kun-Young) The lower tax rate would only have positive effects on the economy such as higher standards of living, increased productivity and increased investment. A lower capital gains tax would increase individual wealth that could be re-invested or contributed to a personal savings account.

Over one hundred million Americans own stock, the majority of Americans that hold stock hold them in mutual funds. (Chait, 2008)  In 2007 mutual fund holders paid over billion dollars in long-term capital gains taxes.  Congressman Jim Saxton, the ranking member of the Joint Economic Committee states: “…Under current law, if shareholders do nothing more than buy and hold mutual fund shares, they will be hit with taxes on long-term capital gains realized by the fund, even if they are immediately reinvested in the fund.”(Mutual Fund Shareholders Slammed Again by Higher Taxes, 2008) As stated that is capital transferred directly to the federal government rather than directly re-invested in the economy.  One recent study by the National Bureau of Economic Research stated that the each dollar in federal tax increase has led to an additional .07 in federal spending. (Tax Increase Would Damage Economic Outlook, 2008) 

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The federal government requires large amounts of funds to continue operation and generally overspends, the current solution it to raise taxes to help pay for large expenses. Despite