Thursday, May 8, 2008

Do Capital Gains Tax Cuts Raise Revenue? (Part 3)

In my prior post, I referenced a chart in an April 18th Wall Street Journal editorial titled "Obama's Tax Evasion". The same basic chart shows up again in a May 6th video clip from CNBC. The chart first appears about 4:45 into the clip and reappears at about 6:09, near the end of the interview. At that point, the host Trish Regan is speaking with John Irons from the Economic Policy Institute. Following is an excerpt of the conversation:

Trish: John, there we go with that capital gains history graphic that I was telling you about, very interesting stuff here because it's showing you, the more you tax, the less you take in.

John: Well again, the problem with that is that it's cherry-picking the timing on this. When you look over longer-run periods of time, if you do lower the capital gains tax rate, you will see lower revenue over the long run.

Trish: Yes, that said, it did go all the way back to 1962 so it was, you know, it did have some history in it.

The chart does go back to 1962 but John Irons is correct that the changes that the chart shows are short-term changes. For example, realizations spiked in 1986, just before the increase in the tax rate was to take place and peaked over the course of the stock market boom in the late nineties. But neither increase in revenues held.

In any case, this once again brings up a couple of serious problems with the chart. As mentioned in my prior post, the chart shows the capital gains realizations, not the taxes derived from those realizations. Since tax revenues are the chief focus of the debate, that is what we should be looking at. In addition, the chart shows the maximum capital gains tax rate but leaves out the descriptor maximum. This gives no information about the other tax rates that are contributing to capital gains tax revenue. Hence, if one looks just at the maximum capital gains rate, one should look just at those revenue that are paid at that rate. As that data is probably not available, it's likely best to look at total tax revenue compared to the average capital gains tax rate. This is shown as the purple line in the chart in my prior post. That posts also lists additional problems with the Wall Street Journal chart.

It's understandable that a person could look at the chart and, on first impression, think that there was something of an inverse relationship between capital gains tax rates and revenues (mistaking realizations for revenue). However, it's disturbing that so many people in the media seem unable to investigate the facts beyond looking at a simplistic chart. That especially goes for media who are mediating presidential debates and reporting in financial newspapers and on financial cable networks. It will be interesting to see if any of those in the media will admit that the issue is a bit more complex than they have portrayed. Lacking that, they should at least fix the chart so that the variables are correctly labelled and are in fact the variables that they are talking about.

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About Me

I became interested in U.S. budget and economic matters back in 1992, the first time that I remember the debt becoming a major issue in a presidential election. Along with this blog, I have a website on the subject at I have blogged further about my motivations for creating this blog and website at this link. Recently, I've been working on replicating studies such as the analysis at this link.

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