A General Equilibrium Analysis of a Reduction in Capital Gains Taxes

The authors analyze the general equilibrium effects of reducing capital gains taxes in a computable general equilibrium (CGE) model. The CGE approach allows the examination of the impact of the tax reduction on the various sectors of the economy. Of special interest is the distributive effects of the tax reduction, measured in this study by the changes in income and utility among six income classes. Positive gains are enjoyed in all six income classes, with the highest percentage increases going to the lowest income class. Of 14 consumption sectors, the largest percentage increase is in savings. This bodes well for future economic growth.