The 2003 Tax Cut on Capital Gains Entirely Paid for Itself

NRO ^ | today | Donlad Luskin

[Marxbites]

I’m not just saying it — CBO is.

On Thursday the Congressional Budget Office released its annual Budget and Economic Outlook, and buried in one of its nearly impenetrable tables of numbers is a remarkable story that has gone entirely unreported by the mainstream media: The 2003 tax cut on capital gains has entirely paid for itself. More than paid for itself. Way more.

To appreciate this story, we have to go back in time to January 2003, before the tax cut was enacted. Table 3-5 on page 60 in CBO’s Budget and Economic Outlook published in 2003 estimated that capital-gains tax liabilities would be $60 billion in 2004 and $65 billion in 2005, for a two-year total of $125 billion.

Now let’s move forward a year, to January 2004, after the capital-gains tax cut had been enacted. Table 4-4 on page 82 in CBO’s Budget and Economic Outlook of that year shows that the estimates for capital-gains tax liabilities had been lowered to $46 billion in 2004 and $52 billion in 2005, for a two-year total of $98 billion. Compare the original $125 billion total to the new $98 billion total, and we can infer that CBO was forecasting that the tax cut would cost the government $27 billion in revenues.

Those are the estimates. Now let’s see how things really turned out. Take a look at Table 4-4 on page 92 of the Budget and Economic Outlook released this week. You’ll see that actual liabilities from capital-gains taxes were $71 billion in 2004, and $80 billion in 2005, for a two-year total of $151 billion. So let’s do the math one more time: Subtract the originally estimated two-year liability of $125 billion from the actual liability of $151 billion, and you get a $26 billion upside surprise for the government. Yes, instead of costing the government $27 billion in revenues, the tax cuts actually earned the government $26 billion extra.

CBO’s estimate of the “cost” of the tax cut was virtually 180 degrees wrong. The Laffer curve lives!

This straight-A report card on supply-side tax-cutting was noted Thursday by Daniel Clifton of the American Shareholders Association — the man who predicted that exactly this would happen when the tax cuts were first enacted. Clifton wrote on his blog,

a capital gains tax cut spurs the growth of new businesses, increases the wage of workers, enhances consumer purchasing power, and grows the economy at large, resulting in more overall gains to be taxed. When capital is taxed at a lower rate, any revenue losses are offset because there is more overall capital being produced, and thus more total revenue being generated. Using the same kind of analysis, we can see that attempts to raise tax revenues by raising tax rates simply doesn’t work. Consider the massive increase in personal income-tax rates imposed by President Clinton and a Democratic Congress in 1993. Compare actual total tax revenues for the four years from 1993 to 1996 to what had been estimated by CBO in 1992 before the tax hikes took effect. Despite increasing the top tax rate on incomes by 16 percent to 28 percent, actual revenues only beat the 1992 estimate by less than 1 percent.

So what led to the gusher of tax revenues in the late 1990s that helped to put the federal budget into surplus? Simple: It was the capital-gains tax cut engineered by a Republican Congress in 1997. Compare actual total tax revenues for the three years from 1997 to 1999 to what had been previously estimated by CBO in January 1997. Despite cutting the capital-gains tax rate by 28 percent, actual total revenues beat the 1997 estimate by more than 11 percent.

These are the numbers. They don’t lie. It’s the Left that lies — just like former Clinton Treasury Secretary Robert Rubin did this week in an op-ed in the Wall Street Journal when he said

The proponents of supply-side theory who assert that tax cuts will wholly — or even significantly — pay for themselves (through increased growth and federal tax revenues), appear to be no more accurate now than they were in the ’90s.

The numbers show that supply-side theory is accurate now and that it was accurate in the ’90s. With the latest evidence from the CBO in hand, as Daniel Clifton says, “It’s time to make the capital gains and dividend tax cuts permanent. Congress has no excuse at this point.”

— Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your visit to his blog and your comments at don@trendmacro.com.

[Marxbites]

Sad but oh so true.

I too believe the foreign banking elites going back to the late 1800's who were established in Berlin, Paris, etc. who married into UK royalty to control the Bank of London, then worked incessantly to get our Fed created in secret. Why was ANY secrecy necessary leading up to it's 1913 passage when nearly the whole senate was already gone for holiday vacation?? Hell, the Fed was the root cause of the Great Depression. Another fact Govt careerists are loathe to admit.

The Fed is uncontrolled by we citizens or our own Govt - it's shares owned by foreigners and the disgustingly wealthy American socialist elites - it has been inflationary since the git-go for the express reason of financing the wars they would profit so handsomely from and which Wilson promised we would not enter - for w/o WWI, WW2 would never have happened.

Not only did the Fed finance thru inflation our end, but the Rothschild connected/owned/contolled American bankers financed Bismark, Stalin & Hitler as well.

These are the devils, Std Oil/BP/bankers that made the mess in the Middle East before most of us were born which we are paying dearly for now.

I have read enough varied sources (many from the 30's and 40's FDR opposers) that for me this conspiracy for elite rule the world is a foregone conclusion.

[Taxman]

Great stuph!

[Taxman]

Thanks for the link. I'll be sure to read the report.

YOu would not be an economist, would you?

[Taxman]

Sad, is it not?

I'd like to think that the American people are "smarting up" a bit. The fact that Hitlery's approval numbers re: the White House are low leads me to believe they are.

All we gotta do now is somehow, someway smarten up the MSM!

Now, there is an all-day bait!

[Taxman]

Thanks, EV. Gotta keep educating these folks!

[Taxman]

And, the Joint Committee on Taxation is just as bad.

There has been a movement afoot in Congress on several FRonts for at least three sessions to change FRom static to dynamic scoring in CBO and JTC calculus, but has only received lukewarm response.

Conclusion: They like it the way it is.

[Taxman]

Whack SSS with your FReedom stick again, Bigun! He does not yet get that FReedom is one hellofalot more important than economic theory.

Listen carefully, SSS, if you sincerely believe that the tax code should not be used to influence economic decisions, then you have to support the FairTax. The FairTax is neutral with respect to the decisions businesses make, because there will no longer be any business income tax!

And, Marxbites and SSS, if you like the flat income tax, you will love the FairTax!

We will never be a FRee people so long as we have an income tax and an IRS!

[Man50D]

Thanks for the link. The article is very informative. It's been officially book marked! There are some very good and valid points. I confess as a person with average intelligence I may not understand every detail but the length of the article alone proves the complexity of the Flat Tax.

[Bigun]

You are a little younger than I and, it appears, we have traveled somewhat different pathways in life only to reach the same conclusions. I am proud to make your acquaintance.

I have, for many years now, been employed in a capacity where I come into contact with a great many college age young folks many of whom approach me privately seeking advise on things political. The advice I give is ALWAYS the same. It goes like this:

Outside your local elections, where you personally know the people involved and the lines can sometimes become blurred, never ever vote for a democrat!

They seem to catch on to that rather well.

[pigdog]

Of course they do ... that's the old "don't rock the boat" syndrome. It doesn't matter that the "boat" is sinking and they'll go down with it since they believe thay can mandate life preservers for themselves and the rest of us be damned.

But they're wrong. Their present cowardice to change the tax system will ruin the country within our lifetimes.

[ancient_geezer]

Interestingly, one thing that the Flat Tax folks tend to overlook with their post card size tax return. The less that goes into the return, the greater the IRS requirement to audit and verify the content of that return.

IRS intrusion into our lives will not decrease with a Flat Tax, if anything we will find them more demanding and more intrusive in assuring the honesty and accuracy of individual and self-employed tax returns as well as the corporate side of the tax system.

[Conservative Goddess]

BS Econ, MS Tax, JD, SOB, CPA, M-O-U-S-E..........

[Conservative Goddess]

A finger to the wind would do just as well as static scoring so we might as well use it, as well as the "ceiling method"...where you gaze thoughtfully at the ceiling while stroking your face (or beard if you've got one) and proclaim the answer. LOL.

We've got to start improving our models....it's just not as easy as we'd like it to be....but we must take those first tentative steps...if we're ever going to learn how to run.....we're taking those tentative steps now.

[Conservative Goddess]

I don't disagree that the UN, WTO, etc are all agencies of redistribution....but we simply must not willingly comply with their plans for us.......

[Marxbites]

Don't get me wrong, I like Boortz alot.

But flat or fair, don't they BOTH include subsidy of the low end? If so isn't that redistributionism that actual taxpayers will still be subsidizing?

Either is preferable to the current state of the taxing gestapo regime, with their padlocks and confiscations.

Much like the ATF, who too often seize a collector's horde in error, abuse and store it improperly, and after years of court battle might be lucky to see it's return worth half from the damages of agents not to mention the losses in atty's fees w/ zero recompense.

The "State" sucks - Montesquieu, I, you & the Founders knew it. I blame it largely on the educrats and the dumbed down America they created.

[Marxbites]

Good for you - I sing the same tunes, if they're leaning Democrat regardless, I'd rather they didn't vote at all.

And I've always thought, having been continously employed since 16, even on college breaks and summers, that if you aren't working/paying taxes, ie contributing & having an actual stake - that they shouldn't be allowed to vote until they learn to give to society more than they take.

I mean, isn't that what we've seen? - those who contribute least have their hands out most, & on our tab to boot?

LBJ's great giveaway to buy the votes his racist So. Dems were losing their party.

What REALLY irks me the most is the opportunity cost to generations of American wealth accumulation, especially among the poorest, of the New Deal, Fair Deal & Great Society. What enormous compounded wealth was lost. It has to a number very much larger than the total dollars these programs were fed - not to mention the strife created by the perverse disincentives.

[Bigun]

I mean, isn't that what we've seen? - those who contribute least have their hands out most, & on our tab to boot?

Indeed that is exactly what we've seen and it is no accident as you so rightly point out. It is time -no! LONG past time - that we, the guys who pay the freight, retake control of our government!

[Bigun]

Damn I which I could recall my Latin! Your tag lines are killin me!

[Bigun]

Either is preferable to the current state of the taxing gestapo regime, with their padlocks and confiscations.

That may be but one, the Fairtax is FAR preferable to the other for a multitude of reasons to numerous to list here.

Retaining anything with the word "Income" in its description is plainly unexceptable as anyone with a screen name like yours should know.

[Conservative Goddess]

"Politiae legibus, non leges politiis, adaptandae" means:

Politics are to be adapted to the laws, not the laws to politics.

If memory serves, when I adopted that as my tagline...I was contemplating the numerous instances where political correctness had influenced judicial interpretation of our Constitution....where "consitutional support" for a politically pre-determined outcome really did serious damage to that document which is supposed to serve as a rock solid foundation.