Taxation of Capital Gains

Report Outline
The Capital Gains Tax and Business Recovery
Place of Capital Gains in American Tax System
Proposals for Exemption of Capital Gains from Taxation
Proposals for Reduction or Modification of Tax
Special Focus

The Capital Gains Tax and Business Recovery

Hoover Proposal for Study of Economic Effects

President hoover, in an address before the American Bankers Association at Cleveland, October 2, 1930, outlined various ways in which he believed the federal government could contribute to a restoration of business stability and the prevention of future depressions. Incidentally, he made the following observation: “I believe inquiry might develop that our system of taxes upon capital gains directly encourages inflation by strangling the free movement of land and securities.” This statement—read at the time as a proposal for repeal of the capital-gains tax—was enlarged upon in the annual message transmitted by the President to Congress on December 2, 1930.

It is urged by many thoughtful citizens [he said] that the peculiar economic effect of the income tax on so-called capital gains at the present rate is to enhance speculative inflation and likewise impede business recovery. I believe this to be the case and I recommend that a study be made of the economic effects of this tax and its relation to the general structure of our income tax laws.

No special investigation of the economic effects of the capital-gains tax has since been ordered by Congress, but a considerable body of opinion favoring abandonment of the tax has developed among bankers and business men. The Treasury Department, meanwhile, has undertaken a departmental study of the effects of the tax. This study was said, semi-officially on December 26, to have led to a “profound belief” that the tax acts as “an irritant” to business, that it has been a disturbing factor in the securities market, and that it may have played an important part in creating the situation that resulted in the collapse of stock values in the autumn of 1929 and the ensuing depression. At the same time it was emphasized that the Treasury Department had made no recommendation to Congress concerning the tax and was not yet ready to take a definite position upon proposals for its repeal or modification.