"Serious" economists and capital gains taxes

Posted by wpcomimportuser1 Friday, April 18, 2008 at 10:02 am

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Commenter common sense writes, apropos of my intemperate anti-Charlie Gibson screed:

You don't know of any SERIOUS economist who agrees that cutting capital gains increases revenue? Not one? I guess you use the word serious to mean 'agrees with me and my friends', and everyone else as 'stupid'.

I did 5 minutes of internet research and found an economist that, unlike you, actually has a Phd in economics from a university that even you would refer to as 'elitist'. He fully supports Gibsons assertions. I'm willing to bet your small paycheck I could find others...

Heck, I'm just one of these corn fed simpletons here in the flyover zone in the midwest but even I can read a graph where 2 events are followed by upward trending lines. I could even describe the reality-based logic that blows your tortured argument out of the water buy why bother? I'm just 'stupid'.

The fact that you take such an important sophisticated topic and take such a pejorative position means that, well, you're not making it as an economic reporter either. If I were you I'd demand a refund on your undergraduate public affairs degree. Shameful. ...

Now I'm all for getting a refund on my college tuition, because, you know, refunds are great. (Almost as good as tax cuts!) I agree that "serious economist" is a lame and somewhat obnoxious formulation and calling Charlie Gibson a "supply-side nut job" was pejorative. But I was mad, and this is my blog, dang it.

Why was I mad? I was mad because Gibson, by repeating the claim that capital gains tax cuts increase revenue, was presenting what is almost certainly a false claim as fact.

The reason I have to use that "almost certainly" qualification, and why I went with "serious economists" in my post yesterday, was that there's no incontrovertible evidence. Capital gains are so volatile, and so dependent on factors other than the tax rate, that it's really hard to tell what the effect of tax cuts or tax increases is.

There's an easily observable one-year effect: Revenue almost always goes up the year after a capital gains rate cut because people can time the realization of their capital gains--and when a cut is coming they'll delay those realizations en masse until after it becomes law. But that's not really evidence that capital gains tax cuts increase revenue; it's just evidence that they shift revenue from one year to another.

Beyond that, it's much harder to say. In the chart in my previous post I measured capital gains tax receipts over the course of a business cycle, and on a real basis they were down in 2007 (which is almost certainly going to be a business cycle peak) over 2000. But that measurement too is subject to all sorts of noise and other possible reasons for the decline in tax receipts.

Which is where the "serious economists" who build models of economic behavior come in. And yeah, basically I mean professors at fancy universities. But on this particular topic I tend to rely on professors at fancy universities who have served in the current Bush administration, because I figure it's hard to dismiss their verdict as political. The current consensus of this crowd is pretty well reflected in a 2004 paper by Greg Mankiw, the former chairman of Bush's Council of Economic Advisers, and Matthew Weinzierl, which concluded that "for standard parameter values, half of a capital tax cut is self-financing."

That means half of the tax cut is not self-financing--so the overall result of the cut is a revenue loss. And those "standard parameter values" include spending cuts to make up for the revenue loss from the tax cuts. If you simply do as the Bush administration has done, and make no commensurate spending cuts, you get less than half of the tax cut back.

Now that's still a pretty good deal, and if you believe the Mankiw-Weinzierl model then it makes sense to keep capital gains taxes low and raise taxes on, say, gasoline. But it doesn't mean that cutting capital gains tax rates will or has ever had the magical effects ascribed to it by Charlie Gibson on TV.

I'm very curious who common sense's Ph.D economist is, because my experience has been that people with actual economics Ph.Ds are--no matter what their political beliefs--congenitally incapable of claiming that tax cuts increase government revenue except in extreme circumstances. Just read my interview with Arthur Laffer! So the making of such claims is generally left to politicians and folks like Stephen Moore. (I wanted to say "charlatans like Stephen Moore," but figure I should leave off on the pejoratives for the moment.)

Now I guess there's no absolute guarantee that the serious economists are right. They've been wrong before. But common sense would seem to support their position (you can't get something for nothing), and it seems to me that, when asking a question in a nationally televised debate, Charlie Gibson shouldn't present the claims of a non-scientific and, yes, non-serious fringe as fact.