The ABC Debate: Enough Capital Gains Tax Nonsense

Despite the confident questions of anchorman Charles Gibson on ABC, capital gains tax cuts are not magic. Over time, cuts in taxes on profits made by investing do not raise total tax revenues. Gibson insisted in his questioning of Barack Obama that they did, and conversely that cuts in capital gains tax rates result in more federal tax revenues. Obama hedged. He should have known the answer: balderdash. Only in the short run do tax revenues rise.

But not only that. George Will condescendingly reiterated the assertion on This Week with George Stephanopoulos Sunday morning and his colleagues did not challenge him. This even after the web was filled with expert corrections of the Gibson claim by Friday: the Washington Post campaign fact checker, The New Republic, and Dean Baker in the American Prospect, to name the few I saw.

When capital gains tax rates are cut, those who are holding profits in stocks will often sell to take short-term advantage. In the first couple of years after the cut, tax revenues may go up. But the long-term effect is the opposite. The Congressional Budget Office agrees that the likely effect over time is lost revenues from tax cuts. So do the Treasury and the Joint Tax Committee of Congress; they simply forecast that that tax revenues rise over time with higher capital gains taxes. Those who claim otherwise are conservative think tanks and a handful of business lobbying organizations who have lost their capacity for objectivity.

Here's a good example of how the argument is distorted. The 1987 Tax Reform Act boosted capital gains tax rates, and capital gains tax collections fell that year. Proof of the pudding, I suppose Will would argue. But why did they rise? Because people sold their stocks the year before in anticipation of the increase in rates. In 1986, tax revenues increased a lot.

The advocates of capital gains tax cuts love to cite the 1997 cut in rates from 28% to 20%. Capital gains revenues went up because people were induced to sell in the short run. But does anyone plausibly believe the wild stock market boom of the late 1990s, which led to further capital gains tax receipts, was a consequence of the rate cut when a high-technology revolution was underway, productivity was taking off, Alan Greenspan had sharply loosened monetary policy, and a speculative bubble was soon to explode?

In fact, capital gains tax revenues fell sharply after the stock market bust in 2000. Then Bush engineered another capital gains tax cut, now from 20 percent to 15 percent in 2003. Yet capital gains tax revenues, adjusted for inflation, have not nearly reached their highs of 2000, despite the 25 percent (5 percentage point) cut in rates. Capital gains tax cuts are no elixir. And the extent capital gains depend on many factors. To isolate it to the tax rate is highly irresponsible economics.

One final point, even Harvard economist and former chief Bush economist Gregory Mankiw has written that such tax cuts do not result over time in higher revenues. In sum, here's the CBO on the issue: "Rising gains receipts in response to a rate cut are most likely to occur in the short run. Postponing or advancing realizations by a year is relatively easy compared with doing so over much longer periods."

It's easy to postpone stock and other investment sales until the time is propitious. But over the long run, tax revenues are lost by the lower rates. People must sell at some point and pay the higher taxes. And the federal government would have more money to pay the bills.

Comments

[Nutcase]

I did my graduate studies in international economics, but let's escape from the intentionally obscuratistic language the 'experts' use to impress each other. Let's put this in simple, everyday language.

The stock market is not a place for investment. That is done largely by investment banks and others directly. How much of the money spent each day at the stock exchange goes to the corporations for devloping our economy or creating new jobs? Essentially nil. It goes from the pocket of one speculator to the pocket of another speculator.

A synonym for speculator is gambler. The stock market is legalized gambling. Why are we giving tax breaks to gamblers? Is gambling an activity that the government should encourage and reward?

Ich denke, folglich bin ich ein Populist.

[joebhed]

Capital Gains Tax Cuts.
Government Revenue Reductions.
Elsewhere on this bizpage is news that we are going to see more bank failures, that the dollar is going down to record lows and that businesses are being driven by the credit crunch to reduce their operations with job losses amid inflation.
These negative activities will impact the incomes of the American people, further negatively impacting government tax revenues.
Right now, the government of the US is broke - it is not bringing in enough revenues to pay its operating expenses, getting by with massive amounts of public debt being issued to foreign and sovereign holders to pay those bills.
Whether they are ordinary deficits of X Billions, or Special Iraq War deficit spending of X Billion or Economic Stimulus Deficits of $200 or so Billions, the point is that we see massive increases in the public"s obligations to the holders of the debt instruments, payable in triplicate as the Debt-Service-Costs(DSC) becomes due.
Those payments are due from the taxpayers. Not from the Capitalist Gainistas.
From the taxpayers.
Where taxes come from.
MINIMALLY speaking, any CapGain cuts that do not certainly return three-fold their value to the Treasurer of the United States should never be considered.
Which brings us to how we are going to get out of this F*&ing mess.
Anyone?

[WASanford]

When I heard Charlie Gibson's question to Barack Obamma I immediately thought Laffer curve. This is the notion that there is a tax rate which will maximise tax receipts. Arthur represented this relationship by drawing an upside down parabola on his dinner napkin. If his contention was correct, his diagram could be reduced to an equation that would be solvable for the rate that would guarantee those maximum recipients. However, when doing so the need to normalize the equation introduces constants (variables?) that have no discernable counterpart in real life. This isn't real math nor is it real economics. It's simply an excuse for a scam that allows the powerful investing class to give itself an advantage. But its fairness index is zero!

[dadw5boys]

2005 MC CAIN VOTED FOR BUSH'S TAX INCENTIVE FOR BUSINESSES TO MOVE JOBS OVERSEAS.

DIDN'T HEAR ABOUT THAT PART OF THE 2005 BUDGET???

THE MEDIA DOING WHAT THEY ARE PAID NOT TO DO REPORT THE FACTS!!!

[time-to-go]

There is another aspect to consider. Business owners and major shareholders can control how they take their profits to a large extent. Do they want to pay out as a salary, a dividend, or beef up assets and sell for a capital gain? The large tax incentive toward capital gain will drive them toward taking profits as capital gains as much as possible. This will provide a statistic that indicates that capital gains and tax on these gains has increased. There really is no benefit to the economy; overall tax revenues decrease; no actual increased risk accrues - just smart tax planning.

The other side is investors know that the capital gains benefit comes and goes. Now that the benefit might soon be gone investors will churn what ever capital gain profit they can and hold on to loss producers to off set gains once the capital gain break is gone. McCain lacks the economic knowledge to see through the hype. He also thought cap gains breaks helped middle classes with 401Ks when Its neutral to 401Ks as has been noted previously. McCain is either dumb or dishonest.

[montemalone]

Hello! Elephant in the room.
Why does noone ever point out that capital gains are realized by the owners/sellers of shares of stock.
If I own G.M. stock and sell for a profit, how does that profit benefit G.M.? That money goes in my pocket. How is that giving G.M. more money for investment to create more jobs to benefit the economy?
And before you say that I have money to reinvest in the stock market, don't forget that the stock I buy will likely be sold to me by some other guy realizing a profit. None of this money goes to the underlying business. It's like selling green beans at the grocery store. The farmer grows the beans and sells them to the processor. He sells them to the wholesaler. He sells them to the grocer. Why can't the grocer claim a capital gain on the sale of his "stock" instead of paying an income tax, most likely at a much higher rate?
Treating the trading of paper (stock certificates, even though few people actually hold them) differently from any other money making activity is inherently unfair.

[Knowbetter]

Hear, hear!

[MikeMidCity]

The card companies are legal loan sharks.

Authorized to charge rates that would have embarrassed the mob, they give money to the congress.

[dadw5boys]

TAX CUTS HAVE NEVER INCREASED ANYTHING BUT THE WEATHY INVESTORS BANK ACCOUNT!!!!!!!

[stevespelling]

I have an excellent idea. The corporate tax rate should be reduced to zero. As long as the company makes investments in businesses that create jobs for American workers. Only when the corporate income is paid out as wages or dividends then the recipients of these payments would be taxed. This would make us the investment haven for the entire world.

[swift goat pet for truth]

Socialize costs. Privatize profits.

[time-to-go]

The problem with this is you are giving every other business entity a huge disadvantage in competing with a corporation. A sole proprietor, a partnership, or a Sub-chapter S corporation would not be able to accumulate profit tax free. Since profit accumulation is a prime way for a growing business to acquire more assets, your plan would allow a substantial advantage to the C corporation. Its more fair to keep marginal rates level.

[cva39]

In addition to the fallacy about lower rates increasing revenue, I am more concerned with the argument that cites stock ownership figures as demonstrating that most Americans benefit by lower capital gan and dividend taxes, as Gibson prefaced his question.

It is an egregious error to state that all Americans who own stock by way of 401K and other deferred tax programs would suffer if capital gains taxes were increased. All proceeds from these plans are taxed at ordinary income rates. Participants in these plans get NO benefit from lower capital gain taxes. It appears that neither the debate moderators ( an oxymoron - there is nothing moderate them) nor the candidates realize this fact. It seems that this ignorance is shared by the majority of experts and politicians who opine on this topic. I frequently am incensed by proponents of lower capital gain taxes who cite stock ownership figures in their arguments for lower rates on capital gains and dividends. It is more troubling that they are nevfer challenged on this point.

[gdcook1969]

1) A higher capital gains tax discourges changes that might be necessary to allow our economy to grow. Painful as it may be, our economy is pretty good about shedding losers and supporting winners, which is why we are often on the cutting edge of new industries. That is because we can invest in them - move assets into new areas with better returns. If you increase the switching costs, you discourage that change, locking people into lower returning assets.

2) Capital gains, unlike wages, involve risk - you get the upside, if things pan out, but you take the full heat on the downside. If you appreciate the value of capital in making our markets work, of saving assets rather than spending them on plasma TV's, why would you tax capital gains, which are not a sure thing, the same as wages, which are. You wish to encourage some level of investment by people - the same way we encourage home ownership or having children, through preferential tax treatment.

3) The crux of the lower-tax argument is that lower marginal rates lead to high revenues through growth of the economy, not through some static 'They have to sell sometime' argument - true, they don't have to sell, but they also don't have to BUY either - they can put there money in real estate, municipal bonds, T-bills, or just fritter it away, if they think pure gains are taxed too heavily.

[WASanford]

Risk? I've spent a good portion of my career working on the shoulders of freeways. One of my co-workers was torn in half by a passing cement truck. Now that's risk! For someone who already has more money than he/she knows what to do with to lose some of it is something other than risk. This country is filled with people who risk their lives in persuit of their occupations. There is no good reason that some investor sitting around his/her swimming pool waiting for the divident checks to come should have a lower tax rate than they have.

[joebhed]

The capital gains discussion should be passe; it should never happen.
If you read the economics news on this page, only the lowest of incomes should see a tax cut to keep them above the poverty level. Such cuts need to be offset by an increase in the tax obligations of the wealthy.
Right now, the government is borrowing many hundreds of billions, if not a trillion dollars, just to get by.
We can't afford any non-offsetting tax cuts for anyone.
We need to reduce the amount of government borrowing, not increase it.
This is especially true for for those competitive, risk-loving, asset-moving capital-gain-istas who run this country and the world.
There is no intrinsic value in the fact that "capitalists" take risks and suffer losses. These losses reduce current and future tax obligations to their max.
Either to the corporation or to the individual.
That's just a smokescreen.

Trillions of dollars have gone down the corporate rathole over this past generation, increasing massively both the public and private debt by Trillions.
The Debt-Service-Costs on that debt is triple the amount of the debt., and that Debt-Service Cost is an obligation of the American taxpayer.
There are no net benefits from past tax cuts, and there has been a huge buildup in the national debt.
It's time to reduce, not to increase, the future debt-service-cost obligatins of American taxpayers
The party's over.