The booming stock market is producing a surge in capital gains, and the U.S. Treasury now expects to collect more in capital gains taxes this year than it has in a decade as investors take their winnings off the table.
The Congressional Budget Office has increased its estimate of expected asset sales, which it refers to as “realizations,” by 45% this year, bringing the total to more than $1 trillion. The increase in realizations is more than 10 times larger than the expected increase in wages and salaries, Politico’s Brian Faler reported Thursday.
The haul will mean that capital gains tax receipts become the third-largest source of government revenue, surpassing corporate income taxes.
“It’s a rare bright spot in the government’s otherwise dismal budget outlook — one that hearkens to the days of the dot-com bubble of the 1990s,” Faler wrote. “Back then, swelling capital gains went a long way towards erasing the government’s deficit.”
The stock market surge is helping state government budgets, too. Tax revenues are 39% higher than expected in Connecticut, for example, pushing receipts back near pre-Covid levels.
The bottom line: In the early days of the pandemic, the CBO cut its estimates for capital gains realizations in 2021 to $823 billion, a reduction of 18%. But the ever-climbing stock market has spurred CBO to revise that estimate upward to $1.2 trillion. As a result, capital gains taxes are now estimated to come to $197 billion in 2021, up from $164 billion in 2020.
Measured as a percentage of the economy, capital gains realizations will equal 5.4% of GDP, Faler said, a level not seen since before the Great Recession.