Under President Reagan, the capital-gains tax rate was cut again in 1981 to a maximum of 20 percent, then increased in 1986 to 28 percent, with a small additional increase in the early 1990s to 29.19 percent. In 1997, as a result of the Clinton-Gingrich compromise, the rate was cut to 21.19 percent. In 2003 the rate was cut to a 15 percent maximum.
Treasury has now released the data through 2002. As result of the frequent rate changes, we have considerable evidence who was right and who was wrong. When the capital gains tax rate was at its maximum in the late 1970s, capital-gains tax receipts averaged slightly under $8 billion annually.
From 1998 to 2002, the maximum capital-gains tax rate was approximately half the rate of the late 1970s, yet capital-gains tax revenues averaged 11 times higher ($88.6 billion per year), though the economy (nominally) was only 4 times larger.
I have summarized some of the new Treasury data in the following table that clearly indicates how sensitive capital-gains realizations are to tax rates.
Now, maybe you don't consider these capital gains tax cuts to be "major tax cuts", but I think that a cut that increased revenue can be said to have paid for itself. Do you agree?
Now, maybe you don't consider these capital gains tax cuts to be "major tax cuts", but I think that a cut that increased revenue can be said to have paid for itself. Do you agree?
You're right to suggest that there may be some disagreement as to whether capital gains tax cuts are "major tax cuts". According to a 2002 CBO report titled Capital Gains Taxes and Federal Revenues:
Individual income tax receipts from capital gains realizations normally make up about 4 percent to 7 percent of individual income tax revenues (see Table 1); they are usually between 2 percent and 3 percent of total receipts. Yet they receive a great deal of attention in revenue forecasting.
In any case, I haven't studied the effect of capital gains tax cuts on revenues. Taking a quick look at some of the on-line studies, however, there appears to be some disagreement on this topic. Following is an excerpt from a favorable Cato study titled The ABCs of the Capital Gains Tax:
On balance, the evidence supports the case for an immediate capital gains tax cut. The economic evidence--and more important, recent actual experience-- suggests that a rate reduction would increase capital investment, new business formation, jobs, and the rate of growth of GNP. When the positive economic impact of a capital gains tax cut is fully accounted for, the current proposed capital gains tax cut will almost certainly be a revenue raiser over the long term or, at worst, will leave the deficit unchanged.
However, following is an excerpt from an unfavorable study titled How Much Will the Capital Gains Tax Cuts In The House-Passed 1997 Tax Plan Really Cost?:
The official estimates of these provisions is that they will increase tax revenues by $2.7 billion over the 1997-2002 period, and then lose $37.5 billion over the following five fiscal years. Even based on these estimates, one must question the soundness of such a fiscal policy because of its ever-growing cost in future years. Citizens for Tax Justice has concluded that the official figure are probably grossly optimistic. We find that a more reasonable estimate of the revenue cost of these proposals is $169 billion over ten years.
Also, following is an excerpt from an unfavorable study titled: Would a Capital Gains Tax Cut Stimulate The Economy?:
In the past, the Joint Committee on Taxation has estimated that capital gains rate reductions of the magnitude assumed in the current proposal would boost realizations sufficiently to increase revenues in the first year or two that the proposal is in effect. After this initial surge, however, the additional realizations would subside, and revenues would decline. Another factor reducing revenues over time is that investors would shift more funds into assets that generate capital gains to take advantage of the lower tax rates. By moving more funds out of assets that generate more highly taxed ordinary income — such as interest and dividends — and into capital gain assets, investors would pay less in taxes overall, further reducing revenues to the Treasury over the long term. Although no official Joint Tax Committee estimates of the proposal are available, these effects would be expected to result in revenue losses totaling more than $50 billion over the next ten years. (In 1999, the Joint Tax Committee estimated a similar proposal to cost $52 billion between 2000 and 2009.
Hence, not having studied the issue in detail and seeing the amount of apparent disagreement there is on this topic, I withhold my opinion, at least until I can look at the data in more detail. Unfortunately, there appears to be less data available on this topic. In addition, the volatile nature of capital gains revenues makes it a harder area to study. However, it should be remembered that capital gains revenues normally make up just about 4 percent to 7 percent of individual income tax revenues. Still, I do plan to look at them when and if I have time and will post anything interesting that I find.