The 15% tax rate for individual capital gains has been a stunning policy success, so why is the corporate capital gains tax rate still a whopping 35%? The empirically proven arguments for low capital gains tax rates apply at least as well for corporations as they do for individuals; it is time to slash the corporate capital gains tax rate.

Every round of cuts in the capital gains tax for individuals has been a stunning success – in 1978, 1981, 1997, and 2003 the capital gains tax rate for individuals was cut and the stock market rallied strongly, driving sizable increases in tax revenues. Cutting the capital gains tax is the ultimate supply-side win-win. The most recent reduction, in 2003, breathed life back into the stock markets from the moment it was conceived, triggering the remarkable rally still underway.

Capital gains tax revenues jump in response to rate reductions because the rate reductions boost the after-tax return on capital, making more economic endeavors profitable, and unlock longer-term gains, freeing up capital stocks for more efficient use. Revenue estimators consider the unlocking effect, but ignore the growth effects, which is why they consistently fail to predict the revenue increasing effects of rate reductions.

On the corporate side, where the capital gains tax rate is still at a relatively high 35%, there is a lot of room for improvement.

A recent paper by Harvard professor Mi hir Desai powerfully makes the case for a rate cut. Because the tax is triple taxation, on top of the corporate income tax and the individual income tax paid on distributions, it discourages corporate investments. For dividends, the tax code provides relief from this triple taxation by excluding 70 or 80% of corporate dividend income from taxation, but there is no relief from triple taxation for corporate capital gains.

Mr. Desai also finds a significant lock-in effect because the tax discourages reallocating assets. He estimates unrealized corporate capital gains at over $800 million at book value. Market value could be more than double that.

This punitive triple taxation of corporate capital gains puts America at a serious competitive disadvantage internationally. According to Mr. Desai, Hong Kong, Singapore, and New Zealand are among the countries that don’t tax corporate capital gains at all. France and Germany, traditional bastions of big government, recently passed laws that exclude 95% of corporate capital gains from taxation. Canada has a 50% exclusion. Japan and the United Kingdom have exemptions for capital gains that are reinvested.

The biggest economic payoff would come from complete repeal of the corporate capital gains tax. Triple taxation makes for bad economic policy, and repeal would create annual efficiency gains in excess of $20 billion. A more politically attractive solution might be to reduce the rate to 15%, matching the individual rate.

A revenue projection run by Desai finds that a 15% rate would reduce federal revenue by $15 billion annually. His methodology considers the unlocking effect but is otherwise static, which mirrors the method used by the Joint Committee on taxation and the Congressional Budget Office. The relatively small number means such a policy could fit in the next major tax vehicle, perhaps this year’s reconciliation package if there is one.

As we’ve learned time and again on the individual side, however, the revenue effect of a reduction in the corporate capital gains tax rate is unlikely to be a decrease. Far more likely is that the investment boom created by reducing this triple tax, unlocking capital, and boosting U.S. international competitiveness will drive the stock market to new heights and create a windfall of federal revenues.

While the corporate capital gains tax is idling, the individual capital gains tax is headed in the wrong direction – under current law a hike is scheduled to occur in less than three years. Both of these situations amount to public policy malpractice. Congress should act immediately to establish a permanent 15% capital gains tax rate for both individuals and corporations, a win-win policy that will promote economic growth and prosperity at the same time it increase federal revenues.

Mr. Kerpen is policy director for the Free Enterprise Fund.