Last night’s debate focused on red-herring issues at the expense of ‘the #1 issue’ on everyone’s mind – the economy.
But in one of the few moments when the debate turned to the economy, Charlie Gibson chose to push the idea that cutting the capital gains tax actually increases revenues.
TNR has the basics:
Charlie Gibson really hammered the candidates–both candidates–over their proposals to raise the capital gains tax. Why woudl they do that, he asked, when lowering the cap gains tax during the 1990s raised revenue?
http://blogs.tnr.com/tnr/blogs…
More importantly, Dean Baker demolishes Gibson’s crazy idea:
http://www.prospect.org/csnc/b…
As President Reagan noted when he signed the 1986 tax reform, taxing capital gains at a lower rate than other income gives people enormous incentive to game the tax code. If the tax rate on ordinary income for high-income taxpayers is 35 percent, and the tax rate on capital gains is 15 percent, then these folks can get a 20 percent return if they can make wage, interest, rent or dividend income appear as capital gains income. This can fuel a lot of creative tax shelters. This gap will also lead to an increase in capital gains tax collection – at the expense of ordinary income tax collections.
But Gibson wasn’t just carrying water for Wall Street – he was carrying water for people like him.
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p>I can’t for the life of me believe that we have endured a week of the “bitter” comment, and we have to listen to Charles Gibson push the idea that taxing hedge fund managers is “raising taxes on ordinary folks.”
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p>And the claim that 100 million folks “earn capital gains” is absurd!! The vast, vast, majority of those capital gains go to the top one percent. Even the folks who earn over the SS/Medicare cap of 97,500 is very small.
I just finished reading two books. One was “Free Lunch” by David Cay Johnston. The other was the “Conscience of a Liberal” by Paul Krugman. Both detail how the economic gains that the nation has made since 1974 have gone to a very small segment of the population. This is born out by the polling that shows Americans aren’t feeling good about the economy even when the economy is doing well. That is because adjusted for inflation, the median family is down about $75 a week.
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p>That is why the elitist comments make me angry. Charlie Gibson rails about the capital gains tax affecting “100 million people,” and it is not really true. 40% of all stocks are held in 401ks and the like, which do not pay capital gains. The top 1% of income earners own 29% of the taxable stock. The bottom 60% owns 9% of taxable stock.
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p>Reducing the capital gains tax is not going to help the median American family. Especially not when compared to reducing health care insecurity, which is one of the leading causes of personal bankruptcy in the United States. In fact, health care is consistently listed as one of the top concerns of Americans.
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p>So, the same press that vilifies Obama for being elitist, also shrills for elitist tax policies that hurt the very people Obama is allegedly scorning. That’s rich.
of quoting you on that in the promotion comment. Hope that’s OK.
http://www.geocities.com/Capit…
Workers who never see a capital gain still benefit from investment which buys equipment to make them more productive. A guy who drives a backhoe makes more money than a guy with a shovel.
This was the most important question and it’s basically gone. I was wondering what all the fuss was about from the Democrats and now I know, somebody finally asked about the tax increases.
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p>The capital gains tax is a tax on risk. All growth comes from risk. So increasing that cap gains tax is guaranteed to reduce growth in the private economy.
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p>The regular worker who never touches a capital gain benefits from investment because he becomes more productive at his job. Labor benefits from capital.
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p>Look at the explosion of the economy after Clinton’s 1997 capital gains cut. Look at the slowdown in the Mass economy after the 2002 capital gains increase.
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p>There is no logic to raising investment taxes even by the Democrats’ faulty economics. Raising investment taxes was the centerpiece of John Edwards campaign and it doomed him. Hear me now and believe me later: the Democrats look at McCain like a tottering oldster, but he will crush either one on this issue alone.
Politically raising taxes is always a killer in any election, and most working people buy into the narrative that its better they “get their money back” rather than trust the government to spend it. This is because since Nixon-Bush nobody trusts government to do anything good anymore. So while I would agree that in reality raising taxes to create specific programs that help people in a very specified way would do them more good than just decreasing taxes most people have lost faith in good government, hence Obama’s comments that they vote on cultural issues.
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p>That said though I also have to agree that its just simple economics that dictates why one lowers capital gains taxes, essentially we shouldn’t tax risk takers since without risk a capitalist economy can’t get moving and really can’t grow. Personally I think we should cut taxes significantly on small business owners and support a non mandated universal healthcare program to help them out as well, thats where the biggest future growth lies. Also it helps our corporations perform better. All that stuff is bigger than just capital gains so Charlie Gibson definitely overplays its positive effects, to credit the 1990s with just cutting capital gains is intellectually dishonest.
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p>But even Bill Clinton knew those taxes had to be cut, of course he was always a moderate liberal (like me!) even if he played the liberal populist during election season, as evidently he and his wife are. Don’t worry, Goolsbee and other economic advisers for Obama will keep him afloat during the populist tides of an election year.
To clarify a bit… Kerry Healey didn’t win by proposing to cut state income taxes deeper than Deval Patrick. Bob Dole didn’t beat Bill Clinton in 1996 even though he proposed across-the-board income tax cuts.
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p>You have to trust the voters to (in aggregate) accurately say what the right level of taxation is. People understand that the government needs money. And anybody can tell you that simply cutting income taxes a point isn’t going to make a big difference in productive behavior. Republicans always want to throw away money on income tax cuts, Dems are always tempted to throw the money away on spending. People can tell what’s going to work and what’s not.
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p>If Kerry Healey had proposed to cut cap gains back to 0 or whatever it was before Jen Swift raised it, she might be governor.
yeah Jane Swift, sorry
Biggest gainers were those that bet against the housing market. Risk, yes, investment, NO!
The parent poses 2 premises- that low capital gains taxes are a primary of economic growth, and that Democrats will lose the Presidential race based on taxes.
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p>For the first, the parent suggests a causation between the 1997 capital gains tax cut and late 1990’s economic growth.
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p>Let’s look at the S&P trend: http://tinyurl.com/3ck6qo
Let’s look at GDP trends: http://www.bea.gov/national/ni…
Let’s look at capital gains tax revenue: http://tinyurl.com/48ssza
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p>Are you seriously arguing that the capital gain tax cuts in 1997 were a driver of economic growth during that period? If so, please explain that. The economy was already humming and the tax cut didn’t really change the trajectory of anything. I think a case can be made that lowering the tax in 1997 didn’t have much tax revenue impact, which I’m sure makes the Laffer crowd happy, but that’s about it.
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p>Further, a capital gains tax is not really a tax on risk. It would be if you couldn’t declare losses, but you can. The capital gains tax is not proportional to the risk you are taking a priori, it’s proportional to the realization of the risk you took. You only get taxes on winners, and you get credited for your losers. That’s different.
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p>Having said all, I don’t support raising the cap gains tax much past 20%, because while it’s not a primary driver of growth, it is a driver, and it does add a bit of friction to the financial markets (I would argue that a little friction is not such a bad thing).
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p>For the second issue, I have a hard time really accepting that Republicans own the tax issue right now. We’re fighting an expensive war and have cut taxes, and as a result we are borrowing from China et al. out the wazoo, after Bush entering the office with Clinton’s balanced budget. My young kids are really excited about servicing that debt.
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p>The Republicans’ record of fiscal management hasn’t in practice been very good for decades now. I’m sure Republicans will raise the tax and spend bogeyman, but they are so guilty of “borrow and spend” that either Democratic candidate should just have to hold up a mirror.
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p>McCain might very well win, but it’s not going to be because of investment tax policy.
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p>unemployemnt
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p>You don’t think the effect of the tax is obvious to the people even before they make the investment? The price of something and the expected reward is well understood in every other transaction people do, it works for investment too.
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p>Obama and Clinton make the mistake of spotlighting who gets the money off the sale of stock, not who gets the money invested in them. Unfortunately, as Jesus said, the rich jerks you will always have with you. For the rest of us to make money, we have to get them to risk that money on the prospect of a payoff from our labor.
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p>Data: http://www.bls.gov/cps/prev_yr…
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p>1992 7.5
1993 6.9
1994 6.1
1995 5.6
1996 5.4
1997 4.9 <=- 28% to 20%
1998 4.5
1999 4.2
2000 4.0
2001 4.7
2002 5.8
2003 6.0 <=- 20% to 15%
2004 5.5
2005 5.1
2006 4.6
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p>So, from 1996 to 1997 unemployment dropped by half a point, and from 1997 to 1998 it dropped by 0.4 points. Whoopee!
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p>At least the 2003 cut coincided with a reversal in the unemployment rate, but I need more explanation of why that was due to the cut, and not due to a general economic recovery that was already underway.
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p>Quite the opposite; that’s my point. You characterized the capital gains tax as a tax on risk. Maybe it’s just semantics, but it’s not a tax on risk, it’s a tax on realized gains. So while the tax impacts the risk-reward nature of an investment (symmetrically- gains are taxed but losses can be credited against other gains), it’s not a tax on risk per se. A tax on risk might look like an up-front tax on buying a stock (which would be really dumb). But I realize as I type this that we’re probably just disagreeing on semantics.
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p>I largely concur with your closing paragraph. Though Obama did raise the fairness issue, which is an issue, because a 15% capital gains tax is essentially a 15% marginal income tax for those who can afford decent tax lawyers.
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p>But otherwise I think both candidates muffed the tax questions. Though the David Brooks editorial about the PA debate was largely repugnant, I actually kind of agree with him that neither candidate should have signed up for any sort of tax pledge. It was a great opportunity to instead talk about borrow and spend Republicans.
This is completely wrong:
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p>Buy a qualifying capital item, say like Wal Mart stock, hold it long enough to qualify for the long term capital gains rate, the sell it and it will be taxed at 15% (federal rate.)
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p>Reduce cap gains rates and you increase tax revenues from capital gains transactions. This is as verifiable as gravity. JFK knew it and proved it by reducing the rate. So did Reagan.
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p>Data in graphical form here, entitled “Capital Gains History” and covers 1962-2007.
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p>Duh.
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p>75% of America owns stock, either through direct ownership, mutual funds (hey, they pay cap gains every time the change their holdings,) 401(k) plans, IRAs, and pension plans.
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p>Raise the cap gains rate and you tax 75% of us. Reduce the rate and help us save for retirement.
Part I: Fairness:
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p>I was referring to the potential for arbitrage. If my marginal income tax rate is 35% and the cap. gains tax is 15%, hmm, just maybe I’ll give a call down to the compensation committee and see if I can’t get paid in stock options rather than a salary, and lo and behold, look at my tax bill. That’s a dumb example, but if red apples are taxed at 35%, and green apples are taxed at 15%, those who can are going to buy some green paint.
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p>Middle class people generally don’t have the option of converting income to capital gains as easily (as compensation for their work).
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p>Part II: Laffer Curve
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p>I know and understand supply side theory. It’s a little silly with respect to income taxes, but it least it has some legs with capital gains taxes. But “verifiable as gravity?” Are you serious?
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p>The WSJ chart is a interesting one; thanks for that link. Comments for you:
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p>The chart shows capital gains realizations, not capital gains tax revenues. Thus, this chart is deceptive as all hell. You have to multiply the two datasets together to get tax revenues, which makes all those big capital gains realization spikes less spikey. It’s no surprise that cap gains realizations go inversely with the tax rate, but the $100B question is the relative elasticity.
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p>It would also be instructive to overlay the chart with the trends of the S&P 500, etc. Although it’s fun to presume that correlation means causation, perhaps other economic trends impact capital gains realizations other than the cap. gains tax rate?
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p>It’s kind of funny, because the same people (WSJ) who pooh-pooh peer-reviewed climate science are happy to engage in much shoddier analysis to support their own views.
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p>Here’s another good one from that article:
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p>Do you think it was intentional that they referenced the number of tax returns rather than the capital gains dollars associated with those tax returns (hint: yes)? Read that sentence again. Total snowjob. Shall we conjecture about what percent of total income is capital gains for those earning under $50k, under $100k, and over $100k?
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p>Finally, reducing the cap. gains tax further will increase volatility in the market further, as there’s even less friction on changing positions. Yay, give us more volatility.
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p>If you’re saving for retirement, your money should be in a 401(k). 401k proceeds are taxed as income, I believe, so the issue of saving for retirement has almost nothing to do with capital gains taxes. Similar deal for Roth IRAs; they are taxed at the start as income, but the proceeds are then tax free.
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p>Let me be clear: I personally own a lot of stock. I’m a frickin’ limousine liberal, for chrissake. I’d be happy to concede that a 40% capital gains tax is on the wrong side of the Laffer Curve. But 15%? Our government is fighting a war, cutting taxes, and selling our future to China and any other entity willing to finance our borrowing. My kids are really happy about that.
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p>But the whole “capital gains tax increases will hurt the middle class” is a half-truth. It’s primarily a tax on the rich, and given trends in disparities in income, they are not the ones who need the help.
(1) Who gives a hoot about the fairness of executive stock options versus earned income compensation? Only class-war-obsessed limousine liberals. In the total aggregate of income and tax receipts, I bet “fat-cats” represent a tiny portion (although I have no cite.)
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p>What matters is the activity across the bulk of capital gains holdings, and the investment actions of those holders. That was the point of the article’s data showing that 79% of tax returns under $100,000 reported capital gains…long-term capital investments are very widely held, and everyone, including the little guy, is hit by higher rates.
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p>And that doesn’t include the trillions of dollars in mutual funds. They pay capital gains whenever they sell a holding. I would guess those assets are very widely held.
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p>(Yes, Roth IRAs and Roth 401(k)s are immune from cap gains tax, but there are contribution limits to these investment vehicles.)
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p>But it’s really, really hard to imply that the cap gains tax is mostly a tax on the rich.
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p>(2) You are right about the axes on the graph. But did you bother to multiply them as you said you should do? Here’s some data (cite here):
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p>Long-Term Capital Gains and Tax Rates, 1977-2002
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p>(1) (2) (3)
1.57 39.88% 62.6116
2.24 28% 62.72
4.1 20% 82
2.31 28.595% 66.05445
4.32 21.19% 91.5408
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p>where columns (1) is Average Realized Gains as a Percent of GDP, (2) is Cap gains rate, and (3) is their product.
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p>Despite this rough math (assumes constant GDP levels,) I’d say this shows an inverse relation between cap gains rate and total cap gains tax revenues generated. Lower rates, yes, but more than offset by higher cap gains activity.
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p>Also, a quote from that source:
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p>(3) There’s an philosophical difference between capital-investment and earned-income economic activity which is why tax policy treats cap gains differently. Mobility of these activities matter; consider them the patient capital which lubricates the economy. Why would we want to create friction by excessively taxing capital gains?
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p>(4) I pay for my stocks in after-tax dollars. Why do I pay again on capital gains? It’s double-taxation!
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p>My guess is that no matter what the data say, progressives, including well-heeled limousine liberals like you, Syphax, would never admit that lower capital gains taxes are a good thing, even when lower rates demonstrably generate more gross tax revenue, because progressive ideology and worn-out liberal class-warfare does not permit it.
… but I thought you might find this to be of interest.
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p>I also contend that your loose math does not prove that cutting rates increases cap. gains tax revenue. In particular, your assumption of constant GDP levels invalidates your numbers entirely.
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p>My conclusions of looking at the data are that the impact of capital gains tax rate increases and decreases has been largely ambiguous. Timing is everything, and there is are a lot of dynamics driving capital gains other than the tax rate.
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p>So I will happily admit that capital gains tax cuts could be a good thing; what I object to is the contention that it’s a given akin to the law of gravity that lower rates increase revenue (especially as you get closer to 0%). I always feel 9.8 m/s2 of gravitational acceleration here on Earth; I fail to see a similar constancy in the capital gains tax rate/revenue relationship.
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p>Further, I question the fairness of taxing Warren Buffet at 15% and his secretary at an effectively higher rate, as does he.
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p>I’m personally not wed to our current tax structure at all. But I think tax fairness matters, and I think a pretty progressive tax rate is fair. If we can agree on a tax structure that is progressive and encourages smart capital allocation, count me in. And hey, let’s discourage excessive consumption of goods with external costs while we are at it.
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This one also shows realizations, not tax receipts (same issue as WSJ), but goes back farther (though it only goes up to 2000).
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p>It’s hard to eyeball, but it looks like capital gains tax receipts actually rose with the increasing capital gains tax rate in the 1970’s. But they also managed to go through 1987 as taxes were cut. So it’s really rather murky.
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p>1986-88 is an interesting period. Note that the spike in 1986 could well be the result of sales anticipating the higher rate, and/or a consequence of ‘portfolio insurance’ and the other stuff the financial engineers were messing around with (note: portfolio insurance doesn’t work without liquidity. Hello, 1987 crash).
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p>In the late 1990’s, realized gains were already trending sharply upward before the cut.
Thanks for the polite discussion.
I don’t make the argument that the cap gains cut will only show benefits the following year. Republicans who want to cut the income tax will tell you, and stimulus-oriented Dems will tell you that their money will pay off the next year. But then the next year they’re back telling you to cut (or spend) again, in order to stimulate.
I agree with the classicals or old supply-siders who said that consumption was only possible from production. The more production of whatever, and not just factory goods, but books or restaurant experiences or art, then the economy grows. But to make the thing to bring it to market, you need capital.
But if you look at any of the trends in the late ’90’s, there was no sea change that occurred after the gains cut. I would argue that the continued growth and reduction in unemployment after the cut were driven primarily by other factors.
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p>I will happily concede that the 28 to 20% cut wasn’t such a bad thing, other than providing a means by which the well-off could reduce their effective marginal tax rate (as they are in a position to convert income to capital gains more than most). But I don’t buy that it was this great catalyst for growth. If anything, it may have further fueled the stock market bubble, but I can’t quantify that.
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p>But 20% to 15%? I have a hard time believing that we’re still on the wrong side of the Laffer curve at 20%. I’d argue that the receipts data is ambiguous, again, because of other dominant economic drivers.
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p>I don’t know what the right capital gains rate is. But my main issue with your original post was the premise that capital gains cuts were this great engine of economic growth. Cutting from 40%? Sure, sign me up. But below 20%? Not so sure.
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p>I am not a supply-sider. Part of the philosophy behind the Toyota Production System is that overproduction is the worst form of muda (waste). You will notice that TPS has worked out pretty well for Toyota, as measured by market share, profitability, market cap, whatever. Overproduction and “push” strategies were a huge problem for the Big 3 (and to some extent still are). Producing something has little value if no one wants it.
the target demographic once again, and again. Racist/sexist didn’t work nor did the replacement elitist/down home gun totin Hillary.
All of them are still owned by Globo-corp.