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Capital gains tax could aid in economic recovery

Posted by michaelm at Nov 10, 2011 02:20 PM |

In our recent policy brief, we propose a new state tax on capital gains. In addition to establishing a rapidly growing source of revenue for important public priorities, implementing such a tax would help our state recover more quickly following economic downturns.

The table below compares the recovery rates of four national economic indicators since 2009 – the stock market, consumer purchases, employment, and wage and salary disbursements.  Since the recession bottomed out in the summer of 2009, the stock market (as represented by the Dow Jones Industrial Average) has recovered far more quickly than other parts of the economy. Since 2009 the stock market has grown by 47 percent. By contrast, consumer spending has grown by 9 percent and employment by less than one percent during the same period. Income from wages and salaries has grown by approximately two percent following the deepest part of the recession.

Recovery rates of key economic indicators

Had a capital gains tax been in place prior to the great recession, state tax resources would be recovering much more quickly relative to current projections. Under a capital gains tax with a five percent rate and a $10,000 exemption, total tax revenues would be growing  by about 2.2 percent this year compared to last year – higher than the current 1.4 percent rate included in the latest revenue forecast. And, revenues would be poised to grow even more rapidly in the coming years as the recovery gains momentum.

Our current revenue structure is ill-equipped to deal with the economic challenges we face.  By implementing a tax on capital gains, we move towards a more adequate and equitable revenue system, capable of supporting the vital public structures all Washingtonians rely on.

While it could not be implemented quickly enough to address our current revenue shortfall, a capital gains tax would significantly improve Washington’s revenue system in the long run.

For more information, read our latest policy brief, A Capital Reform: Using capital gains to fuel job creation and economic prosperity in Washington state.

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