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Wednesday, April 23, 2008
Fiscal Fiction: Addressing Misconceptions, Pt. II
Memo to ABC's Gibson: Capital Gains Cuts Also Cut Revenues
... in each instance, when the [capital gains tax] rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.... history shows that when you drop the capital-gains tax, the revenues go up.
Intuitively, Gibson's claim is far-fetched. True, if revenues increase following a capital gains tax rate cut, that's short-lived, and a function of investors delaying selling stock when they know a tax cut is imminent. After the cut takes effect, they then declare their gains and pay taxes at the lower rate. Empirically, as the Congressional Budget Office puts it in a revenue and tax policy brief:
[r]ising gains receipts in response to a rate cut are most likely to occur in the short run... The potentially large difference between the long- and short-term sensitivity of realizations to tax rates can mislead observers into assuming a greater permanent responsiveness than actually exists.
And from Gregory Mankiw, former chairman of President Bush's Council of Economic Advisers:
To what extent does a tax cut pay for itself? In almost all cases, tax cuts are partly self-financing. This is especially true for cuts in capital income taxes... For a cut in capital income taxes, the feedback is ... about 50 percent -- but still well under 100 percent and paybacks of 50 percent still mean a net revenue loss for the Treasury.
And finally, Will Rogers: "It's not the things he just don't know, it's the things he knows for sure that just ain't so."
Posted by Dana Chasin
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