Fact Check PA Debate: Do lower capital gains taxes raise revenues?

[DSeid]

Such was a moderater claim during the PA Democratic debate last night. Is it true? Do lower capital gains taxes increase revenues and higher capital gains taxes raise revenues?
Or were such both merely functions of other correlated variables?

I cannot imagine that such is indeed simply linearly related. Obviously, the lowest capital gains tax, zero, would raise the least revenues. More likely there is, for each economic environment, an inverted U - lower than which and higher than which lowers revenues.

Anyone with more knowledge to bear than my guessing?

[Ludovic]

I don't have firm numbers w/r/t capital gains per se, but just look at the tax rates versus national deficit in the 1980's-today.

1980-1990: Taxes lowered -- deficit boomed.
1990-2000: Taxes raised -- deficit tumbled
2001-2008: Taxes lowered -- deficit boomed.

Hmmm.

IMO, the simplification of the tax structure around 1980 did contribute to an increase in revenue, as people make decisions based more on economics and less on tax. But the argument that lowering taxes to around %10-%20 from %20-%30 will help the economy so much that you will gain more in revenue is not supported by the experience of the past ~30 years.

Just looking at it from a tax revenue perspective, if the money does not return a better rate in the economy than you'd get from paying off the national debt, you've just thrown away that money without helping the government revenue at all. While most of the time investing by the private sector would, there are exceptions such as airlines and dotcoms.

And of course there is the question of how long do you have to wait for the increased revenue? If the extra investment happens too quickly it will likely be far from ideal returns, and we know what we are in the long run.

OTOH, some make the argument that lowered taxes prevent unethical behavior, by making outright cheating or using foreign tax shelters marginally unattractive. The solution to that is tighten up the laws and hire more enforcers.

[redtail23]

Here's one discussion of it that I found: link.

Here's a supply-sider talking about the Treasury info: link. Please note that even a supply-sider doesn't try to pretend that it's as simple as "lower rate = more revenue".

It looks like Gibson picked up some Dittohead talking point and tried to pretend it was real. That's what I thought last night and that's what I still think.

I found the moderators very, very, very annoying in the little I managed to watch last night.

Quit asking stupid questions, and quit arguing with the debaters!! You're supposed to be moderating the debate, not making your name as a "hard-hitting journalist". Gah!

"Is Reverend Wright more patriotic than you?"

"Well, let's see, I'm a 17.3 on the patriotism scale. Reverend Wright is only a 16.5, so he's slightly less patriotic than I am. However, please note that Ronald Reagan was only a 12.8, so it's all a bit relative."

[BobLibDem]

I don't think it's known because you can't isolate one variable. You can't run the period 1990-2000 with one rate and then run that same period exactly the same except with a lower rate and then see the affect of tax rates in isolation of other factors.

[BrainGlutton]

Consider the source.

Barack Obama put it well when he spoke of how the two anchors of this evening's debate (and so much of our elitist media & punditocracy) seem interested mainly in "manufactured issues"-- Jeremiah Wright, dodging bullets in Tuzla, flag lapel pins and Bill Ayers-- a major reason so many decent and generous Americans tune out this media.

"Pain trickles up" is how Obama tonight described John McCain's economic policies. That smart riff brought pain to Charles Gibson's face. In a previous debate, Gibson, who must make a few million a year, made a class gaffe when he estimated that professors in a small New Hampshire college made close to $200,000. Laughter filled the hall that night. Americans of Main Street got a glimpse into a media that has far more friends on Wall Street.

Tonight, Gibson seemed shocked when the two candidates spoke of raising taxes on the very richest in this country. He seemed far more concerned about the Democratic candidates' proposal to raise the capital gains tax--and what he claimed would be the lost revenue-- than the fact, as the New York Times's Steven Greenhouse reports in his new must-read book, The Big Squeeze, that "since 1979, hourly earnings for 80 percent of American workers have risen by just 1, after inflation...[at a time when]the nation's economic pie is growing, but corporations by and large have not given their workers a bigger piece"

A one percent raise in almost thirty years? Still not bitter?

[hawthorne]

You can get transitional revenue jumps with taxes like capital gains when change is expected. Since the tax is levied on realisation not accrual, deferral of realisation and thus liability is a big part of tax planning. If you know a rate cut is coming it will make sense to delay whatever realisations you may wish to make a little longer.

This does not of course mean that there will be a permanent increase in revenue.

[Renob]

Originally Posted by Ludovic

1990-2000: Taxes raised -- deficit tumbled

Actually, Clinton lowered the capital gains tax rate during his term. IIRC, it was around 1996 or so.

[DSeid]

redtail your second link doesn't work for me, but thanks to all for confirming my suspicions.

[Gadarene]

Actually, Clinton lowered the capital gains tax rate during his term. IIRC, it was around 1996 or so.

"Just before he left office" is what they said last night, I believe. I don't know what year that would be. Probably not 1996.

[BrainGlutton]

Originally Posted by Gadarene

"Just before he left office" is what they said last night, I believe. I don't know what year that would be. Probably not 1996.

From Wikipedia:

From 1913 to 1921, capital gains were taxed at ordinary rates, initially up to a maximum rate of 7 percent.[1] In 1921 the Revenue Act of 1921 was introduced, allowing a tax rate of 12.5 percent gain for assets held at least two years.[1] From 1934 to 1941, taxpayers could exclude percentages of gains that varied with the holding period: 20, 40, 60, and 70 percent of gains were excluded on assets held 1, 2, 5, and 10 years, respectively.[1] Beginning in 1942, taxpayers could exclude 50 percent of capital gains on assets held at least six months or elect a 25 percent alternative tax rate if their ordinary tax rate exceeded 50 percent.[1] Capital gains tax rates were significantly increased in the 1969 and 1976 Tax Reform Acts.[1] In 1978, Congress reduced capital gains tax rates by eliminating the minimum tax on excluded gains and increasing the exclusion to 60 percent, thereby reducing the maximum rate to 28 percent.[1] The 1981 tax rate reductions further reduced capital gains rates to a maximum of 20 percent.

The Tax Reform Act of 1986 repealed the exclusion of long-term gains, raising the maximum rate to 28 percent (33 percent for taxpayers subject to phaseouts).[1] When the top ordinary tax rates were increased by the 1990 and 1993 budget acts, an alternative tax rate of 28 percent was provided.[1] Effective tax rates exceeded 28 percent for many high-income taxpayers, however, because of interactions with other tax provisions.[1] The new lower rates for 18-month and five-year assets were adopted in 1997 with the Taxpayer Relief Act of 1997.[1] In 2001, President George W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001, into law as part of a $1.35 trillion tax cut program.

[Gadarene]

We were both right, Renob. But you were righter.