The Curious Capitalist, Justin Fox, Economy, Markets, Business, TIME

January 28, 2008 5:15

Do capital gains tax cuts increase revenues?

Posted by Justin Fox | Comments (2) | Permalink | Trackbacks (0) | Email This

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!

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Reader Comments (2)

mediasux:

unfortunately, such charts never tell us anything, because capital gains tax cuts don't occur in a vaccuum, but are generally accompanied by "closing loophole" provisions.

Nevertheless, there is probably a short term impact in terms of revenue gains -- for the first couple of years, people sell off stocks they'd been holding onto to avoid the capital gains tax. Once that wears off, receipts go down.

I'd like to suggest that one way to increase revenue is a capital gains tax increase -- for instance, we should see a significant increase in capital gains tax revenues in 2008, because at the end of 2008, the capital gains tax cut expires -- and everyone will be selling off stocks to take advantage of the last year of lower tax rates. (We should also expect to see a sharp decline in the stock market, unrelated to economic conditions, because of this sell-off.)

Posted by mediasux | January 29, 2008 3:16 PM

agelesswarrior:

Oh my. You know you are in for a silly analysis when it starts by referring to the evil "supply-siders" as "zealots" and labels a mischaracterization as a "cherished belief". No knowledgable supply-sider states that ALL marginal tax-rate cuts result in an increase in total revenues. It simply depends on which side of the peak of the Laffer Curve you are on. Secondly, your sarcastic statement "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!" is actually offensive! Of course other economic factors apply and must be taken into account. Where do supply siders deny that? Thirdly, the twin sister of "all marginal tax rates cause increased revenue" is the equally silly "all marginal rate increases cause increased revenues" which you seem to indicate must be one of your "cherished beliefs". In fact, evidence from CBO reports (data not verbiage) indicate that the 2003 tax cuts earned $26 billion in 2004 (estimated $125 billion loss but actually a $26 billion 2 year gain!)

Posted by agelesswarrior | May 15, 2008 3:50 PM