Revision of Federal Tax on Capital Gains

December 19, 1936

Report Outline
Action on Taxes in the Next Congress
Treatment of Gains and Losses Prior to 1934
Revision of the Capital-Gains Tax in 1934
Capital-Gains Tax and Economic Recovery
Special Focus

Action on Taxes in the Next Congress

President Roosevelt in campaign speeches at Pittsburgh on October 1 and at Worcester on October 21 declared that rising receipts would enable the federal government to balance its budget within a year or two without imposing new or increased taxes. Secretary of the Treasury Morgenthau made a similar statement in an address in New York City, October 23, and Senator Harrison (D., Miss.), chairman of the Senate Finance Committee, concurred with these views at a press conference upon his return to Washington, November 20. Barring unforeseen emergencies, therefore, no major tax legislation is to be anticipated at the coming session of Congress. Harrison predicted that the tax on undistributed corporate profits would be left unchanged, except for minor revisions to correct inequalities. He indicated that most of the nuisance taxes due to expire June 30, 1937, would be continued for another year, since “every possible revenue should be had by the government and every saving made so that we may approach a balanced budget in two more years.” Although the Finance Committee chairman made no mention of the subject, it has been reported that the administration may suggest modification of the present income-tax provisions relating to capital gains and losses if it is found that such action can be taken without large losses of revenue. It is understood that studies of the question have been initiated to provide information for the guidance of the President in determining whether or not to recommend this change.

Capital-Gains Tax and a New Stock-Market Boom

Recent indications of an incipient boom in the stock market are believed to be responsible for the attention now directed to the capital-gains tax. It is well known that the administration, while seeking to promote economic recovery, desires that prosperity should return gradually and upon a sound basis. A runaway stock market would be regarded as an omen of future disaster. Numerous economists contend that one element contributing to the enormous rise of stock prices in 1928 and 1929 was the fact that the market was not restrained by the natural check that would have been imposed if holders of stocks whose prices had greatly appreciated had been able to sell without paying a substantial share of their profits to the government in the form of gains taxes. The unwillingness of many persons to sell under those circumstances, it is asserted, tended to intensify a scarcity condition and hence to force prices still higher toward the inevitable brink. According to this theory, if gains had been taxed more moderately or completely exempted from taxation, profit-taking sales would have occurred in greater volume and acted as a balancing force to keep prices more closely in line with true values.

Regardless of whatever influence the government's tax policy may have had upon the stock market, capital gains were a fruitful source of federal revenue during the boom years. Appeals to Congress to adopt the British system of exempting such gains from taxation consequently fell upon deaf ears. After the market collapsed, however, federal revenues suffered severely, not only from a precipitate drop in the yield of the capital-gains tax but from a sharp reduction in the yield of the regular income tax owing to the offsetting of capital losses against ordinary income. Congress then took steps to restrict use of losses in this manner, and in 1934 it introduced a radical change in the method of taxing gains. While the latter change was intended to ease the tax burden on capital gains, maximum relief was made available only in the case of assets held more than 10 years. The new law thus could not be expected to encourage profit-taking in a future boom. On the contrary, it might tend to defer such action.

ISSUE TRACKER for Related Reports
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Jun. 28, 2013  Internet Shopping
Jan. 16, 1998  IRS Reform
Mar. 22, 1996  Tax Reform
Apr. 06, 1990  How Fair Is the Nation's Tax Burden?
Aug. 28, 1987  Taxing Business Services
Oct. 17, 1986  Tax Reform In The States
Sep. 28, 1984  Tax Debate: 1984 Election and Beyond
Mar. 19, 1982  Tax-Exemption Controversy
May 19, 1978  Property Tax Relief
Apr. 07, 1978  Tax Shelters and Reform
Feb. 10, 1971  Property Tax Reform
Mar. 26, 1969  Tax Reform Pressures
Mar. 24, 1965  Excise Tax Cuts and the Economy
Feb. 15, 1961  Flexible Taxation
Apr. 02, 1959  State Tax Problems
Apr. 23, 1958  Tax Reduction, 1958
Aug. 14, 1957  Fast Tax Write-Offs
Apr. 10, 1957  Federal Payments in Lieu of Taxes
Sep. 12, 1956  Corporation Profits and Taxes in Prosperity
Mar. 16, 1954  Shares in Tax Relief
Nov. 21, 1953  Revision of Excise Taxes
Mar. 19, 1953  Federal-State Tax Relations
Oct. 01, 1952  European Taxes and Tax Evasion
Nov. 03, 1950  Excess Profits Tax
Feb. 01, 1950  Tax Loopholes
Jun. 04, 1949  Excise Taxes
Oct. 27, 1948  Postwar Sales Taxes
Aug. 29, 1947  Taxation of Family Income
Apr. 09, 1947  Income Tax Relief
Jan. 11, 1946  Taxation of Cooperatives
Oct. 16, 1945  Federal Taxes on Business
May 08, 1944  Postwar Taxes
Sep. 20, 1943  Sales Taxes
Dec. 05, 1941  New Taxes for Defense
Apr. 05, 1941  Taxation for National Defense
Feb. 28, 1941  Taxation of Alcoholic Beverages
Jan. 11, 1941  Exemptions from Taxation
Dec. 04, 1940  Federal Taxes and Defense Financing
Feb. 01, 1940  Sharing of Tax Revenues
Feb. 02, 1939  Turnover Taxes in the States
Nov. 05, 1937  Broadening of the Income-Tax Base
Jun. 17, 1937  Exemptions from Income Taxation
Apr. 05, 1937  Coordination of Federal and State Tax Systems
Dec. 19, 1936  Revision of Federal Tax on Capital Gains
Nov. 02, 1936  State Taxation of Natural Resources
May 26, 1936  Assessment of Property for Taxation
Apr. 17, 1936  Federal Taxes on Consumption
Mar. 19, 1936  Taxation of Undistributed Corporate Profits
Dec. 17, 1935  Reduction of Tax Burdens on Real Estate
Oct. 21, 1935  Tax Delinquency in the United States
May 21, 1935  Comparative Tax Burdens in America and Britain
Feb. 01, 1935  Federal Taxation of Corporations
Nov. 27, 1934  Elimination of Conflicts in Taxation
Jul. 25, 1933  Taxation of Excess Profits
Jan. 25, 1933  Tax Burdens and Tax-Free Securities
Nov. 23, 1932  The Beer Tax and the Sales Tax
Dec. 19, 1931  Sales Taxes: Federal, State, and Foreign
Sep. 18, 1931  Death Taxes and the Concentration of Wealth
Mar. 18, 1931  Federal Taxation of Large Incomes
Jan. 10, 1931  Taxation of Capital Gains
Nov. 09, 1929  Federal Tax Reduction-1930
Aug. 08, 1927  Federal Tax Reduction—1928
Sep. 27, 1926  Tax Reduction and the Public Debt
Jan. 16, 1926  Taxation of Estates and Inheritances
Nov. 07, 1925  Federal Taxation of Small Incomes
Nov. 28, 1924  Social, Fiscal and Legal Aspects of the Inheritance Tax
Apr. 07, 1924  Causes and Effects of the Tax Return Blockade
Dec. 12, 1923  Tax Exempt Securities
Dec. 10, 1923  Taxation
Investment and the Stock Market
Tax Reform