And he obviously doesn’t understand the economy, because history shows every time you have cut capital gains taxes, revenues have increased, going back to Jack Kennedy.
It's unclear why McCain mentions Jack Kennedy since, according to this table, there was no change in the capital gains tax rate between 1942 and 1967, four years after Kennedy's death. In any case, George Will expanded on this theme just about one minute into the shows's roundtable segment. Talking about questions that Obama was asked in the April 17th Democratic debate, he said:
One was on capital gains where he conceded the premise of the question as he should because it's true that when you raise capital gains tax rates, you lower revenues from that and he said he'd do it anyway. Even if it reduced the return on American investment, even if it cost the government revenues, he'd do it out of some abstract commitment to fairness.
I thought it odd that Obama would concede that higher capital gains tax rates would bring in less revenues but that he would raise them anyhow. Hence, I checked a transcript of the debate and found the following exchange on page 3:
GIBSON: But history shows that when you drop the capital gains tax, the revenues go up.
OBAMA: Well, that might happen, or it might not. It depends on what's happening on Wall Street and how business is going. I think the biggest problem that we've got on Wall Street right now is the fact that we got have a housing crisis that this president has not been attentive to and that it took John McCain three tries before he got it right.
This is the only point where Obama directly addressed the contention that cutting the capital gains tax rate cause revenues to go up. There is no concession there. Hence, George Will was wrong on that point. What seems more important, however, is the fact that Gibson and Will state the contention that capital gains tax cuts increase revenues as though it is an established tenet of economic theory. Why else would two supposedly objective journalists state it as though it were an accepted fact?
I have previously looked at the effect income tax rate cuts on revenues. My analysis is at http://www.econdataus.com/taxcuts.html. However, I have not looked closely at the effect of capital gains tax rate cuts on revenues. In looking at existing studies, it becomes immediately clear that their positive effect on revenues is far from accepted. In fact, the majority of evidence suggests that they have a negative effect on revenues. An article from the Center on Budget and Policy Priorities list studies by the Congressional Budget Office, Congressional Research Service, and Treasury Department that conclude that capital gains tax rate cuts lose revenues. I did find this Treasury document that projects on page 128 that making the dividends and capital gains tax cuts permanent would cost $196 billion and $104 billion, respectively from 2009 through 2018. Finally, the following excerpt is from a summary of a paper co-authored by N. Gregory Mankiw, former chairman of President Bush’s Council of Economic Advisors and a Harvard economics professor:
According to the researchers, the neoclassical growth model and all of its variants indicate that the dynamic response of the economy to tax changes is substantial. In almost all instances, they find, tax cuts are at least partly self-financing. The authors conduct some simple calculations, plugging in numbers that approximately describe the U.S. economy. They find that, in the long run, about 17 percent of a cut in labor taxes is recouped through higher economic growth. The comparable figure for a cut in capital taxes is about 50 percent. This means that the true revenue cost of a cut in capital taxes is only half of the cost estimated with static scoring.
All of the studies of capital gains tax rate cuts that I've seen seem to agree that they lose revenue. If anyone has seen a study that suggests otherwise, please leave a comment with a link to it. In any event, it's clear that the claim that such cuts increase revenues is, at the very least, heavily contested. I hope that the media will start reporting this issue as such instead of parroting the claim that capital gains tax cuts raise revenue.