This Week's George Stephanopoulos did not challenge Sen. John McCain's assertion that “history shows every time you have cut capital gains taxes, revenues have increased -- going back to Jack Kennedy.” Stephanopoulos did not note that, notwithstanding a potential short-term revenue increase, many economists have challenged the claim that revenue goes up over the long term as a result of capital gains tax rates being cut.
On the April 20 edition of ABC's This Week, host George Stephanopoulos did not challenge Sen. John McCain's assertion that “history shows every time you have cut capital gains taxes, revenues have increased -- going back to Jack Kennedy.” McCain's claim echoed ABC World News anchor Charles Gibson's assertion, during the April 16 Democratic presidential debate, that “history shows that when you drop the capital gains tax, the revenues go up.” Additionally, during a panel discussion later on This Week, Washington Post columnist George F. Will asserted, "[I]t's true that when you raise capital gains taxes -- rates, you lower revenues from that." However, as Media Matters for America documented, notwithstanding a potential short-term revenue increase, many economists have challenged the claim that revenue goes up over the long term as a result of capital gains tax rates being cut. Indeed, the nonpartisan Joint Committee on Taxation estimated in June 2006 that the 2006 extension of the 2003 cuts on capital gains taxes would result in decreased revenues of $20 billion over 10 years.
In a 2006 letter to Congress, the Congressional Budget Office (CBO) stated, “In analyzing the relationship between capital gains tax rates and capital gains realizations, it is important to distinguish between the temporary and permanent effects of tax rate changes. Investors can generally choose when to realize their gains; if they believe that tax rates will change in the future, they may try to time their realizations to occur during a period with lower tax rates.” Indeed, notwithstanding a potential short-term increase, numerous economists have challenged the suggestion that an overall increase in revenues always occurs when capital gains tax rates are lowered:
The Congressional Research Service wrote in 2007: “Some commentators argue that reducing taxes on long-term capital gains will not reduce federal revenue but will, in fact, result in increased revenue. It is argued that as taxes are reduced on capital gains, 'lock-in' is reduced, which increases realizations and investments in capital assets. The net effect is to increase federal revenues.
”Although taxes on increased capital gains realizations would offset some of the initial cost of cutting capital gains taxes, there is considerable uncertainty about the magnitude of the unlocking effects. It appears that over the long-run, the revenue generated from an increase in capital gains realizations accompanying a tax cut would not be large enough to offset the static revenue loss from the tax cut itself. A net revenue gain is also less likely under current law than it was in the past, in part because the increase in realizations would be taxed at lower rates than would have been the case in the past."
Referring to Gibson's assertion during the Democratic debate, Gerald Prante, senior economist for the Tax Foundation, wrote: “Gibson's implying that cutting capital gains taxes raises tax revenues by the mere time series correlation he cited was a stretch. Much of the short-run response to changes in the capital gains tax rate are for tax timing purposes. This is a well-known fact, and it is why CBO projects a huge spike in capital gains collections in 2010 (the last year of the scheduled low 15% rate on long-term gains) and thereby also a large decline in 2011 (when the rate on long-term gains is scheduled to revert to 20%) under current law.” According to the "About Us" page of its website, the Tax Foundation believes that "[t]axes should raise revenue for programs while consuming as small a portion of national income as possible, and should interfere with economic growth, trade and capital flows as little as possible."
As Media Matters documented, in an article published in the Journal of Public Economics, N. Gregory Mankiw -- former chairman of President Bush's Council of Economic Advisers -- and Matthew Weinzierl asked, “To what extent does a tax cut pay for itself?” Mankiw and Weinzierl concluded, “In almost all cases, tax cuts are partly self-financing. This is especially true for cuts in capital income taxes” [emphasis added]. Discussing those findings in a 2007 blog post, Mankiw noted, “Matthew Weinzierl and I estimated that a broad-based income tax cut (applying to both capital and labor income) would recoup only about a quarter of the lost revenue through supply-side growth effects. For a cut in capital income taxes, the feedback is larger -- about 50 percent -- but still well under 100 percent.” A May 17, 2006, Knight Ridder Newspapers article citing Mankiw's study noted that “paybacks of 50 ... percent still mean a net revenue loss for the Treasury.” The article also reported, “Treasury Secretary John Snow conceded Tuesday that the much-touted tax cuts for capital gains and dividend income don't drive today's strong economy. Asked by Knight Ridder if the tax reductions paid for themselves, Snow acknowledged that they don't.”
Dean Baker, co-director of the Center for Economic and Policy Research, asserted in an April 17 American Prospect blog post addressing Gibson's statement: "[T]he evidence that a capital gains tax cut raises revenue is rather dubious, since most of the apparent increase is likely due to timing: investors delay selling stock when they know a tax cut is imminent. After the cut takes effect, they then declare their gains and pay taxes at the lower rate."
In a New Republic blog post about Gibson's question, Jonathan Cohn quoted Brookings Institution economist Jason Furman as follows: “Joint Committee on Taxation and Treasury both score raising capital gains taxes as raising revenues. There is some behavioral response but much of that is timing and doesn't affect the medium-to-long term revenue loss.” According to Cohn, Furman stated that “the experience after the 1997 cut and the 2003 cut is not a meaningful way to assess the impact of capital gains tax cuts on revenues because so many things were happening simultaneously.”
Further, according to the CBO, past changes to capital gains tax rates alone do not necessarily explain even short-term changes in capital gains realizations. From the CBO's 2006 letter to Congress:
The substantial volatility in capital gains realizations makes it difficult to accurately project gains or discern from historical realizations how much taxpayers respond to changes in capital gains tax rates as distinct from their responses to other factors that influence realizations. For example, substantial increases in gains of 40 percent, 25 percent, and 21 percent occurred in the years immediately following the rate reduction enacted in 1997. Those increases might suggest a large behavioral response to the tax rate cut -- except that realizations also increased by 45 percent in 1996, before the rate cut. Thus, changes in realizations are not necessarily the result of changes in taxes; other factors matter as well.
CBO has updated its latest models with available data through 2004. Those models, which incorporate changes in the tax rate, fall well short of explaining the surge in realizations that occurred in 2004. Roughly half of the growth in realizations between 2003 and 2004 remains unexplained. After examining the historical record, including that for 2004, we cannot conclude that the unexplained increase is attributable to the change in capital gains tax rates. Volatility in gains can stem from other factors, such as changes in asset values, investor decisions, or broader economic trends.
Additionally, during the panel discussion later on This Week, Will asserted that Sen. Barack Obama “conceded the premise” of Gibson's question about the impact of cutting capitals gains tax rates. In fact, after Gibson asserted that “history shows that when you drop the capital gains tax, the revenues go up,” Obama stated: “Well, that might happen or it might not. It depends on what's happening on Wall Street and how business is going.”
From the April 16 Democratic debate:
GIBSON: You have, however, said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, “I certainly would not go above what existed under Bill Clinton, which was 28 percent.”
It's now 15 percent. That's almost a doubling if you went to 28 percent. But actually, Bill Clinton in 1997 signed legislation that dropped the capital gains tax to 20 percent.
GIBSON: And George Bush has taken it down to 15 percent.
GIBSON: And in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?
OBAMA: Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness. We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year -- $29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That's not fair.
And what I want is not oppressive taxation. I want businesses to thrive, and I want people to be rewarded for their success. But what I also want to make sure is that our tax system is fair and that we are able to finance health care for Americans who currently don't have it and that we're able to invest in our infrastructure and invest in our schools.
And you can't do that for free, and you can't take out a credit card from the Bank of China in the name of our children and our grandchildren and then say that you're cutting taxes, which is essentially what John McCain has been talking about. And that is irresponsible.
You know, I believe in the principle that you pay as you go. And, you know, you don't propose tax cuts unless you are closing other tax breaks for individuals. And you don't increase spending unless you're eliminating some spending or you're finding some new revenue. That's how we got an additional $4 trillion worth of debt under George Bush. That is helping to undermine our economy, and it's going to change when I'm president of the United States.
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've got a housing crisis that this president has not been attentive to and that it took John McCain three tries before he got it right.
And if we can stabilize that market and we can get credit flowing again, then I think we'll see stocks do well, and once again I think we can generate the revenue that we need to run this government and hopefully to pay down some of this debt.
From the April 20 edition of ABC's This Week with George Stephanopoulos:
STEPHANOPOULOS: A lot of Americans angry right now about the economy.
STEPHANOPOULOS: And on Friday, you conceded that Americans are not better off than they were eight years ago. But the Democrats are launching an ad campaign this week where they're going to try to pin some comments you made during the primaries on you. Take a look.
[begin video clip]
McCAIN: I think you could argue that Americans overall are better off because we have had a pretty good, prosperous time.
With low unemployment.
A lot of good things have happened.
A lot of jobs have been created.
I think we are better off overall.
NARRATOR: Do you feel better off?
[end video clip]
STEPHANOPOULOS: The theme is going to be -- and you know it -- you're out of touch.
STEPHANOPOULOS: You just don't get it. How do you respond?
McCAIN: Well, I have an economic plan. It's good. It's strong. Things have gotten worse in the last several months, as we all know, in our economy. Americans are struggling. American families are sitting around the kitchen table today trying to figure out how they're going to keep their home, keep their job.
Times are very, very tough. And the worst thing you can do, worst thing you can do is raise taxes. Both Senator Clinton and Senator Obama want to raise taxes. That's out of touch, that's out of touch.
Senator Obama says that he doesn't want to raise taxes over -- on anybody over -- making over $200,000 a year. Yet he wants to nearly double the capital gains tax -- nearly double it -- which 100 million Americans have investments in -- mutual funds, 401(k)s. Policemen, firemen, nurses -- he wants to increase their taxes. 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. So, out of touch? Yes. They are out of touch when they want to raise taxes at the worst possible time, when we're in a recession.
STEPHANOPOULOS: Your -- your own plan --
McCAIN: We're gonna cut taxes. We're going to reduce spending. We're gonna put a freeze on discretionary spending. We're gonna make wealthy people pay for their own prescription drugs. We're going to scrub every institution of government and put them out of business.
STEPHANOPOULOS: You know, you just mentioned your plan to have wealthy people means-tested -- increase their Medicare premiums. That's going to hit people -- individuals earning about $84,000 a year.
McCAIN: A hundred and sixty thousand, couples.
STEPHANOPOULOS: Couples for a $160,000. How is that different -- that premium increase different from a tax increase?
STEPHANOPOULOS: So George, Wednesday night: first impression, last impression.
WILL: In 21 debates, the two most interesting and revealing questions were asked in this debate. And they were not about his friends or his lapel pins. They were about policy.
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 taxes -- rates, you lower revenues from that -- and 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. And then on raising Social Security taxes -- or the body of income susceptible to the 12.4 percent rate -- he clearly says he's considering raising taxes on those making more than $103,000, much less --
STEPHANOPOULOS: Let me throw you the question I --
WILL: -- than what he had at $200,000.
STEPHANOPOULOS: -- I asked Senator McCain. What's the principal difference between that and raising the Medicare premium for people at the same income level?
WILL: Well, a Medicare premium is an entitlement program to which you are susceptible if you get ill. Social Security is a tax to which you're susceptible if you live in America.
SAM DONALDSON (ABC News national correspondent): And Social Security is not an entitlement program? Excuse me. But let me go back to the debate. Your question. There are two things.
I wish, George, that people who control elections in this country -- let's say the people in the middle -- looked at the policy and thought about the capital gains tax. I think, though, over a good number of years I've discovered they look at character. They look at, “Do I like this person; do I trust this person?” -- all of those issues that were brought up in the first half of the debate. And I wish Senator Obama's fans -- in and out of the media -- would concentrate on his answers and say he gave a good answer here, not that the question was off base. When you attack the questioner, you attack the messenger. Look at his answers and defend them and say he gave good replies, and that will satisfy people, if you can.
COKIE ROBERTS (ABC News political commentator and National Public Radio news analyst): He does a good job sort of after the fact. I mean, the brushing of his lapel was good.