A Comparison of Japanese and American Taxation of Capital Gains

Japan has employed heavy tax preferences for capital gains as part of a spectacularly successful national policy of encouraging capital formation and economic growth. The United States, in contrast, brought an end to sixty-five years of capital gains preferences with the Tax Reform Act of 1986. A very limited cut was enacted in 1990. However, President George Bush has made further reductions in the capital gains tax a central goal of his administration. This Note analyzes the experience of both nations and examines the effects of capital gains taxation on economic efficiency, levels of national investment, the politics of income distribution, and simplification of the tax code. The Note concludes that cutting tax rates on capital gains encourages investment only by benefiting the wealthiest taxpayers and distorting the economic decisions of investors. This Note proposes new legislation which would resolve this dilemma while greatly simplifying the tax code