Charlie Gibson, in the Clinton-Obama debate last night, proclaimed that when the tax rate on capital gains are reduced, the result is overall an increase in tax revenues from capital gains taxes. That seems to me a pretty big claim, so I was surprised that neither Clinton nor Obama took a position that disputed Gibson’s premise. I was surprised both by the fact that Gibson made such a bold claim, and the fact that neither Clinton nor Obama disputed him. So, I tried a little Google research. I found a number of web-sites that support Gibson, and I found one web-site that gives a different view –written by Justin Fox, TIME Magazine’s business and economics columnist, here. Here are his comments:
One of the most cherished beliefs of supply-side zealots is that cuts in capital gains tax rates always increase revenue. To be sure, there are often dramatic upward revenue swings right after the cap gains rate is cut. But that is in part because people can choose when to enter into the transactions that result in capital gains–and they’d be idiots not to hold off a few months if they know the tax rate is about to drop.
A better test is whether receipts are higher over the course of an entire business cycle. Last week, as part of its latest 10-year budget projections (pdf!), the Congressional Budget Office published its estimate of capital gains receipts in fiscal 2007. I’m willing to bet that, recession or no, FY 2007 will prove to be a peak in capital gains receipts that won’t be matched for several years. Which means we can compare it with the peak of the last cycle, in 2000. Here’s the chart, with the numbers adjusted for inflation:
So no, the reduction in the capital gains tax rate from 20% to 15% in 2003 did not result in an increase in revenue over the course of the business cycle. In 2000 receipts totaled $119 billion, which equals $143 million in 2007 dollars. In 2007, they totaled $122 billion. That’s a 15% decline.
Now I guess you could argue that 2000 was the peak of a once-in-a-lifetime stock market boom, making it an unfair comparison. But that would amount to admitting that forces other than the capital gains tax rate determine the course of the stock market. Perish the thought!
All these capital gains made by businesses and individuals are directly related to the quality of the public infrastructure in place paid for by these taxes. Roads, rail, airports, water, sewer, the internet, education, and research get shortchanged when funding is reduced that can contribute to the ability to efficiently sustain those profit growths. I can’t help but wonder if there is a measurable correlation.
Sigh…You’ll believe in global warming with temperatures going down, but not in tax rate cuts when revenues go up.
Hi Joe. What planet are you on? This one’s gotten warmer.
And you’ll note, if you’re not having trouble seeing through our earth atmosphere, that the chart shows how the 1997 rate cut was followed by a SLOWING of the rate of increase in revenues. So the revenues were growing, the rates were cut by 8%, and the revenues grew slower.
That, to me, says more about the theory than tracking through an economic cycle.
Don’t worry T, Joe will be covering all my market shorts since he is obviously in it long!