Kudlow urges capital gains tax cut to revive US economy

Larry Kudlow, who served as director of the National Economic Council under President Donald Trump, published an opinion piece July 7 arguing that cutting the capital gains tax would unlock investment, boost Treasury revenue and accelerate US economic growth.

"Lower taxation encourages full disclosure by individuals, small businesses and big companies," Kudlow wrote, echoing the Laffer Curve theory that reducing rates can increase total tax revenue by expanding the taxable base. The former White House economist has long advocated supply-side tax policies as a growth lever.

The current top federal long-term capital gains rate stands at 23.8% — 20% plus the 3.8% Net Investment Income Tax — after the Tax Cuts and Jobs Act of 2017 lowered it from the prior 23.8% effective rate. Short-term gains are taxed as ordinary income, with the top marginal rate at 37%. A reduction would mark the first major change to investment taxation since the TCJA took effect.

Kudlow's proposal arrives as the US economy faces headwinds from elevated interest rates and persistent inflation that has outpaced wage gains for many households. The Federal Reserve held its benchmark rate at 5.25% to 5.5% through June, the highest level in more than two decades, keeping borrowing costs elevated for both consumers and businesses.

Proponents argue a capital gains cut would encourage asset sales, unlocking gains that investors have deferred to avoid the current tax bite — a phenomenon known as the "lock-in effect." Higher transaction volumes could boost market liquidity and free up capital for reinvestment into new ventures. The Tax Foundation has estimated that past capital gains rate reductions increased real GDP by 0.2% to 0.5% over a decade, though revenue effects depend heavily on timing and economic conditions.

The proposal also carries implications for the federal budget. The Congressional Budget Office projected a fiscal 2026 deficit of $1.6 trillion, or about 5.5% of GDP, before any new tax cuts. Lower capital gains rates could reduce near-term revenue unless the economic expansion they generate is sufficient to offset the rate reduction — a dynamic that remains hotly debated among economists.

Critics counter that capital gains tax cuts disproportionately benefit wealthy households, who hold the majority of taxable investment assets. The top 1% of US households by income own roughly 50% of individually held stocks, according to Federal Reserve Survey of Consumer Finances data, meaning the bulk of any tax savings would flow to the highest earners.

The political path forward remains uncertain. Democrats in Congress have proposed the opposite — raising capital gains rates to 39.6% for households earning more than $1 million, matching the pre-TCJA ordinary income top rate. California Governor Gavin Newsom recently opposed a ballot initiative that would impose a 5% wealth tax on the state's roughly 200 billionaires, warning it could drive high-net-worth individuals out of the state.

Kudlow's call for a cut aligns with broader Republican tax priorities ahead of the 2026 midterm elections. Many provisions of the TCJA are set to expire after 2025, setting up a major tax policy debate in the next Congress. Whether a capital gains reduction gains traction will depend on which party controls the House and Senate after November.

This article is for informational purposes only and does not constitute investment advice.