From The Great 2012 Cashout in the Wall Street Journal, 11/28/12


It’s also a good bet that some of the recent stock market volatility is due to investors seeking to realize capital gains at today’s 15% tax rate, before that rate rises to 23.8% (including the ObamaCare surcharge) on January 1. When the capital gains rate last rose, to 28% from 20% as part of the 1986 tax reform, investors also cashed in before the higher rate took effect.

Tax revenue from capital gains in 1986 soared to $52.9 billion, then dropped to $33.7 billion in 1987 and stayed largely flat for nearly a decade. It boomed again after Bill Clinton and Newt Gingrich agreed to return the rate to 20% in 1997.

When government raises taxes on dividends and capital gains, it is lowering the after-tax return on stocks. Share prices will fall over time to adjust to that new rate of return, reducing overall wealth in the private economy, all other things being equal. As for the feds, history suggests they’ll see a capital gains and dividend revenue windfall this year, but then a decline next year even at the higher rate.

It’s the oldest lesson in tax policy: Tax something and you get less of it. In this era when envy trumps growth, the government is raising taxes on thrift, investment and risk-taking in the name of fairness and to finance more government spending. No one should be surprised when there are fewer dividends and capital gains to tax.


This is as predictable as any tax policy can be.  Only a fool would have expected any other response.  Taxes on dividends and investment are the easiest to avoid.