Friday, April 03, 2009

HEY CHUCK, THAT QUESTION WAS BASED ON TWO FALLACIES

Charles Krauthammer in today's Washington Post:

Fairness through leveling is the essence of Obamaism. (Asked by Charlie Gibson during a campaign debate about his support for raising capital gains taxes -- even if they caused a net revenue loss to the government -- Obama stuck to the tax hike "for purposes of fairness.")

Does Obama deserve criticism for that answer? Sure -- but only because what he really should have said to Gibson was "Charlie, you don't know what the hell you're talking about."

Here's the question, from the Democratic debate on April 16, 2008:

GIBSON: All right. 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.

OBAMA: Right.

GIBSON: And George Bush has taken it down to 15 percent.

OBAMA: Right.

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?


But lowering the capital gains tax doesn't increase revenues, except temporarily. Who says so? The Congressional Budget Office (emphasis mine below):

Because taxpayers can choose when to realize capital gains (and losses), more gains are realized when tax rates are lower. However, over time, the increase in realizations induced by lower tax rates is not sufficient to offset the direct impact on revenues from the tax reduction itself, for two reasons. First, revenues will always increase by less than realizations following a tax cut because gains are taxed at the lower rate... Second, increases in realizations are generally much larger in the short term than in the long term because some of the additional revenues in the short term come from gains that would have been realized in later years. ...

Separating the effects of changes in the tax rate from other factors affecting capital gains realizations is difficult. The best estimates of taxpayers' response to changes in the capital gains tax rate do not suggest a large revenue increase from additional realizations of capital gains--and certainly not an increase large enough to offset the losses from a lower rate.


In fact, as the Center for Budget and Policy Priorities has noted,

The non-partisan Congressional Budget Office (CBO) and the Joint Committee on Taxation have estimated that extending the capital gains tax cut enacted in 2003 would cost $100 billion over the next decade. The Administration’s Office of Management and Budget included a similar estimate in the President’s budget.

That was the Bush administration, mind you.

The other fallacious part of the question concerns those alleged 100 million capital gains recipients. Wouldn't all those ordinary Joes and Janes benefit from a capital gains tax cut? No. As CBPP notes,

Most middle-income Americans own much or all of their stock through 401(k)s, IRAs, or other tax-preferred saving accounts. They do not pay taxes when their stocks within those accounts go up, so a change in the tax rate doesn't affect them.

Those of us in middle-class jobs with benefits could have told millionaire Charlie Gibson that -- and Krauthammer, too.

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