T Nation

Supply Side Econ is Working

From today’s Wall Street Journal:

Gaining Capital
January 24, 2005; Page A18

Some people continue to believe, or at least still assert, that tax rates don’t influence taxpayer behavior all that much. We therefore direct their attention to the Treasury Department’s latest historical data on revenues from taxes on capital gains.

The numbers look like a 25-year demonstration of the Laffer Curve in action. Taxes paid on capital gains have been highly responsive to the maximum capital gains tax rate. Especially notable is how, over the years, capital gains realizations and the taxes paid on those gains have tended to increase in the years following a cut in the capital gains tax rate.

The reductions highlighted in the chart include the famous William Steiger tax rate cut that passed Congress in late 1978 over Jimmy Carter’s objections, the Reagan tax cut passed in 1981, and the cut that was part of the Clinton-Gingrich balanced budget deal of 1997. All of those reductions caused taxpayers to cash in more of their gains and thus yielded revenue windfalls for the federal Treasury in succeeding years.

On the other hand, the capital gains tax increase of 1986 – which moved the rate back up to 28% from 20% – proved to be a revenue disaster. Taxes paid on long-term capital gains (those typically held longer than one year) fell off a cliff to $33.7 billion in 1987 from $52.9 billion a year earlier. And they stayed at close to that mediocre lower level for nearly another decade. In other words, higher rates didn’t do anyone any good, not even the politicians who thought they’d be getting more tax revenue to spend.

We aren’t asserting that tax-rate changes have been the only factors influencing revenue changes. The performance of the broader economy and the stock market have also mattered a great deal. Capital gains revenues boomed in the late 1990s after the 1997 rate cut, but they fell abruptly with the bursting of the dot-com and tech bubbles in 2001.

The evidence is overwhelming, however, that lower rates induced more taxpayers to realize their capital gains, and thus produced more tax revenue despite the lower rates. The top capital gains rate was cut again in 2003, to 15%, and it is likely that Treasury will also report an increase in revenues in that year and in 2004 as the stock-market rebounded smartly.

In each of these episodes, we should add, Congress’s Joint Tax Committee predicted more or less the opposite. Wedded to its static models that underestimate the impact of behavioral incentives, Joint Tax predicted revenue losses from tax-rate cuts and revenue gains from tax-rate increases. In recent years Joint Tax has finally acknowledged some “unlocking” effect on capital gains realizations from lower rates, but it still refuses to recognize any revenue impact from faster economic growth or from a stronger stock-market that tax reductions on capital help to promote.

The refusal to take control of Joint Tax has been a major failure of the GOP Congress, and should be a priority as it contemplates tax reform that President Bush has said must be “revenue neutral.” Republicans will have a much better chance of passing a pro-growth tax reform with lower rates if they have a revenue-estimating bureaucracy that is pledged to accuracy instead of to its old habits. Ways and Means Chairman Bill Thomas, take note.

[quote]BostonBarrister wrote:
From today’s Wall Street Journal:

Gaining Capital
January 24, 2005; Page A18

[…]
The numbers look like a 25-year demonstration of the Laffer Curve in action. Taxes paid on capital gains have been highly responsive to the maximum capital gains tax rate. Especially notable is how, over the years, capital gains realizations and the taxes paid on those gains have tended to increase in the years following a cut in the capital gains tax rate.
[…]
[/quote]

This is actually a very good article. It brings a point that I’ve made before, which is that I would expect much lower (than the ones we are getting now) taxes from a Right-Wing government.

I actually think that Bush’s tax cuts from his previous term were way too small considering his political inclination, and that it would make absolute sense for him to go much further this term, including a dramatic reduction in capital gains taxes.

Right now, we pay over 700 billion dollars in FEDERAL taxes every year!

After all, if Republicans don’t use taxes for balancing out the income and shortening the gap between the rich and the poor, why not reduce those taxes - a lot?

Of course, on a more selfish level, having lower taxes would increase my quality of life and make up a tiny little bit for all the other crappy policies of the Republicans…

I agree. Further tax cuts would be welcome, both in the income-tax and the capital-gains tax.

I’d like to see non-military spending decrease as well of course – that’s the other side of the coin that one would expect from a traditional – at least in the Reagan tradition – Republican government.

Lower taxes, less non-defense spending. I could have wet dreams about this.

Many of the policies like the SEC and having accreditied investors actually increases the gap between the rich and poor. Would I have my money in a hedge fund if I could? Damn right I would. I want the potential for a 30%+ annuliazed rate of return.