Question

The federal government currently taxes the increase in the value of share of stock when they are sold. This is called the capital gains tax. Explain why, if the government reduced the tax rate on capital gains, it could actually receive more total revenue. In your answer, carefully distinguish between tax rates and tax revenue.

Answer 1

Answer : If government had reduced the tax rate on capital gain than they earned more tax revenue the reasons are:

• If capital gain tax has been reduced than this will increase the selling of investment/ assets. To avoid higher tax rates some people hold there investment for a long time.
• But as the tax rate on capital gain has been reduced than new investment will create more GDP growth rate of the country.
• More GDP growth rate resulted will created more revenue for the government at lower capital gain tax rate.
• The main reason for increasing total revenue is number of transaction has been increased as a result of lower tax rate charged by the government.

As tax rate and tax revenue of capital gain are always interlinked. Tax rate on capital gain is the rate which government charged on selling of an asset/ investment where as the revenue is generated from the number of transaction of selling multiplied tax rate.

From this we conculde that reducing the tax rate can increasing the selling of assets/ investment which resulted increasing tax revenue of the government.