One of the hottest taxation topics in the United States in recent years is the debate over capital gains taxes, those fees paid on the profit from investments. A capital gain can be realized through the sale of stocks or bonds, collectibles, or a home or business. The purpose of the tax is to encourage long-term investment, generally for a period of more than one year. To make the debate even more complicated, the term "capital" can be used to include physical equipment, such as buildings and fixtures, in addition to money.

While those who oppose a cut in capital gains taxes assert it would be a huge tax cut for the wealthiest Americans and would result in a significant loss of revenue, those who favor a reduction in the capital gains tax insist it would actually increase tax payments from the upper class and result in the creation of more jobs.

Tax Reform

Remarkably, the debate over capital gains taxes was prompted by the tax cut reforms instituted by President Ronald Reagan in 1986. As part of the Tax Reform Act of 1986, the top rate for capital gains taxes was increased from 20 percent to 28 percent. Ever since then, Republicans and conservatives have been calling for a reduction of that rate. Those efforts have been opposed by Democrats and liberals who maintain the loss of revenue would place a burden on federal coffers, shifting the tax burden to the less affluent.

Opposition to cutting the capital gains rate continued through the administration of President Bill Clinton and the first part of the term of President George W. Bush. Temporary relief was gained with the Jobs & Growth Tax Relief Reconciliation Act of 2003 that cut capital gains rates through January 1, 2009. Under that legislation, the current 20 percent and 10 percent capital gain rates for individuals were reduced to 15 percent and 5 percent respectively. The debate again will be rekindled as the 2009 deadline for the cuts nears.

Mountain or Molehill

Whether or not the amount of the capital gains tax serves as a detriment or incentive to investment and job growth remains an open question, but the total revenue the tax raises is more straightforward. According to advocates of the tax reduction, capital gains taxes in the 1990s amounted to only 3 percent of federal revenues. During that period, from $25 billion to $30 billion was raised each year by the tax.

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