NCPA Advocates CGT Cut To Boost America's Stock Markets

by Carla Johnson, Investors Offshore.com

10 October 2001

The National Center For Policy Analysis issued a statement on Monday suggesting that the cut in capital gains taxes proposed by many Republicans, and supported by President Bush would likely have a beneficial effect on the ailing stockmarkets in the US.

Although some experts, for example former Treasury Secretary Bob Rubin, have suggested that a reduction in the capital gains tax rate would effectively 'lock-in' the stock markets by increasing selling pressure and pushing stock prices down even lower, the NCPA argues that two other factors may well offset this, and cause asset prices to rise.

To the extent that CGT is capitalized into asset prices, the NCPA says, a reduction should cause asset prices to rise. Also, as gains are realised on investments, they must be reinvested, and as capital is reallocated from appreciated assets to assets with greater appreciation potential, the market as a whole should theoretically rise.

In its report, the NCPA admitted that there was no definite time frame for these trends to take effect were a reduction of the CGT rate to take place, but pointed to the 1978 cut which lowered the top rate from 49% to 35%, and following which the S&P 500 index rose by 45% over 5 years.

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