Tag Archives: taxes

Capital Gains Taxes and Federal Revenues

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The Wall Street Journal offered a history lesson with empirical data relating taxes on investment to revenues collected by the government since 1977, a period when capital gains taxes were alternately raised and lowered by a capricious Congress.

This figure tells the story, which I’ll only summarize; you should read the whole lesson.

Essentially, raising tax rates—as has been noted for other Federal taxes—lowers tax revenues, and lowering the rates increases the collected revenues.

A couple of things in the figure are noteworthy, though.   The tax rate drop to 20% in 1981 did not lead to a drop in revenue—surprise—but 1982 was a year of a sharp recession, and collected revenue from that lowered rate still remained flat: no drop with the recession.  Collected revenue then ran up hard as we came out of the recession.  Additionally, the sharp drops after the sharp increases that resulted from the rate decreases in 1997 and 2003 came from the dot-com bubble burst that saw the NASDAQ, for instance, lose 60% of its value and from the Panic of 2008, whose hard recessionary effects we’re still in the middle of.

There’s another impact of higher capital gains tax rates, though, as the WSJ also points out.  High rates disinclines investors from selling their holdings as soon as they might.  This sequesters those investment monies in present investments, making them unavailable to other investments—younger, newer, more agile businesses with more current ideas, for instance—that might be better places, on a purely business basis, for investment dollars.  Moreover, the higher capital gains tax rates lower the returns on investments, leading other investors to demur from committing their funds in the first place to such investments.  The taxes distort the investment decisions.

But President Obama doesn’t care about healthy revenue collections for government; he doesn’t care about a healthy economy.  He cares about his definition of “fairness.”

GIBSON: So why raise [capital gains tax rates] 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.

Government Tax Increases and Government Spending Cuts

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Stipulate, arguendo, that government spending is stimulative.  In order to pay for the stimulative spending, government must collect taxes or borrow.  Taxes taken away from the citizens, though, is money the citizens no longer can spend.  Raising taxes to pay for increased stimulative spending is even more money that those citizens now cannot spend.  This reduced private spending offsets the public spending funded by that taxation.

Increased taxes to support increased public spending reduces private spending even more than the amount of the tax increase, though.  The increment above the simple reduction in private spending comes from individuals and businesses now being especially careful to husband their monies: they increase their savings so as to improve their ability to handle unforeseen problems, such as a medical emergency, a roof repair, a capital plant problem, another increase in their tax bill beyond the one just suffered.  Thus, private spending is reduced further by increased saving, and a tax increase results in a net reduction in the sum of private and public spending.

This offset doesn’t change when government borrowing, rather than tax increases, is used to fund stimulative (government) spending.  Americans aren’t stupid.  We all recognize that today’s government borrowing is just tomorrow’s increased taxes and/or rising inflation, and so the above husbanding still occurs.

This is a relatively symmetric relationship.  A reduction in tax rates achieves two positive things (although after a minimum threshold, the second positive becomes a wasteful negative).  The first positive thing is that more money is left in the hands of private individuals and private businesses.  This additional money is either spent, which is directly stimulative, or it is saved against one of those unforeseen events, or for a planned large expenditure, future retirement, or future investment.

Thus, saving is stimulative tomorrow, and more than that, the saved money actually serves two stimulative roles.  One role is that this is the money private individuals and our businesses are going to spend tomorrow for one of the reasons just described.  The other role is through private or commercial lending/borrowing.  Those savings are assets that banks and other financial institutions can lend to our neighboring private individuals and to our businesses, so our neighbors and businesses have increased money for their current spending.

The second positive thing is that with these reduced tax rates, economic growth is encouraged, and that increased economic activity generates more revenue for the government beyond the direct reduction from those reduced rates.  However, since government has no need of money beyond funding the few things our government was created to effect, any amount beyond that level is wasteful and so provides room for reducing tax rates even further.

Finally, in the real world, where (Keynesian) stimulus spending has been shown to be wrong empirically (vis., FDR’s “stimulus” spending during the Great Depression, which prolonged the Depression; and Obama’s “stimulus” spending in the present deep recession, which is prolonging the recession), reduced government spending also is net stimulative.  Government spending crowds out private spending through at least two mechanisms.  Government demand artificially elevates prices compared to the level at which those prices would exist in the face of solely private demand, and private spending is reduced by lack of need to purchase: the government will buy and transfer the goods to the private individuals.  Reduced government spending reduces that crowding out, and private individuals and businesses return to the market place.

He Just Doesn’t Get It, Treasury Precinct

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Eric Morath, of The Wall Street Journal, describes Secretary Treasury Timothy Geithner’s speech this week before the Economic Club of Chicago.  Geithner said,

The challenges facing the American economy today…are about the barriers to economic opportunity and economic security for many Americans and the political constraints that now stand in the way of better economic outcomes[.]

So far, so good.  But then, Geithner claims that the deficit- and debt-exploding “stimulus” spending this administration and its predecessor inflicted on our economy in 2008 and 2009 helped avoid a much deeper depression.  (As an aside, it’s interesting to note that, just as everyone else in this administration who’s made this claim has done, Geithner declined to offer any evidence whatsoever to support his claim.)  He also insists that government needs to do yet more to stimulate our economy.

Then he argued, in all seriousness, that cutting spending and taxes won’t stimulate the economy.  Here’s the Treasury Secretary insisting that leaving more of our money in our hands to spend—or save—according to our needs isn’t stimulative.

Additionally, here’s that same Treasury Secretary arguing the old, failed Keynesian thought that government spending, of its nature, is stimulative.  The thing with government spending, though, is that it crowds out private spending, it doesn’t add to it.  With the government buying, there’s less need for individuals or businesses to buy: government will, and give it to us.  Look at health care.  Look at food stamps (which I pick on due, among other things, to the impact of farm price supports and the government-mandated ethanol program on food prices).

And

There is no economic or financial case for using the fear of future deficits to cut as deeply into core functions of the government, to weaken the safety net or fundamentally alter Medicare benefits[.]

No, of course not.  He’ll just have more money printed up to cover those costs.  Never mind that all that inflowing printed currency is just inflation, either today or tomorrow, which will only erode the value of the money coming from that Federal spending—and the value of what money we still have after taxes.  The government can print money to keep up with its inflation.  We cannot.

No, Mr Geithner, the political constraints challenging our economy today consists entirely of too much Federal government interference in our economy.  The most important thing that government needs to do more of right now, to help our economy, to stimulate our economy, is to sit down and put its collective hands in its collective pockets.  Do more nothing

Taxes, Revenue, and Growth

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Do Federal revenues come from taxes or from economic growth?  (I’ll elide, for this post, a discussion of whether the Federal government needs the revenue it wants to collect.)  A couple of better men than me offer up some thoughts:

There is a point at which in peace times high rates of income and profits taxes destroy energy, remove the incentive to new enterprise, encourage extravagant expenditures and produce industrial stagnation with consequent unemployment and other attendant evils.

and more loquaciously,

Our true choice is not between tax reduction, on the one hand, and the avoidance of large Federal deficits on the other. It is increasingly clear that no matter what party is in power, so long as our national security needs keep rising, an economy hampered by restrictive tax rates will never produce enough revenue to balance our budget just as it will never produce enough jobs or enough profits.  Surely the lesson of the last decade is that budget deficits are not caused by wild-eyed spenders but by slow economic growth and periodic recessions, and any new recession would break all deficit records.

In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the rates now…. The purpose of cutting taxes now is not to incur a budget deficit, but to achieve the more prosperous, expanding economy which can bring a budget surplus.

Who said these things?  Those old and venerated, in some circles, Democrats: Woodrow Wilson in the first case, in his 1919 message to Congress, and John Fitzgerald Kennedy in the second, in his 1962 speech to the Economic Club of New York.

Here’s a graph from our current Progressives’ favorite exemplar, Europe, courtesy of Dan Mitchell at the International Liberty blog:

EU-15 refers to the 15 nations which comprise the 15 members of the pre-May 2004 European Union: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom—e.g., western Europe, less Norway and Switzerland.

The graph shows, decade by decade, the steady reduction in economic growth of those 15 EU nations as their governments, individually, and the EU “government” generally, expanded their size and control over their nations’ economies and their citizens’ abilities to make their own decisions.

As an aside, how do we get an economy to generate revenue?  Not this way:

Shall we create more jobs by aping Europe, which since 1990 has averaged 9.16% unemployment while ours was 5.95%?

[L]ike the leaders of the bankrupt states of Europe, President Obama believes that the key to prosperity is to regulate, engineer, and direct the economy; to raise taxes; to augment the powers of government; to substitute collective largess for family cohesion; to spend money that does not exist…to paraphrase Macbeth, to borrow, to borrow, and to borrow.

Hmm….

Some “Tea Partiers” and Budgets

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The White House objects to Congressman Paul Ryan’s (R, WI) latest budget proposal as the end of the welfare state.  I certainly hope it is.

As to the rest of The Wall Street Journal‘s op-ed, what they said.

Some—by no means all, but every grouping has its extremists—who aver themselves to be tea partiers need to withdraw their heads from rectal storage and pay attention.  In DC, in politics, in any endeavor, we need to not hold out for everything all at once, or we’ll get nothing at all, and at once.  Take what we can get today, and come back tomorrow to work for more.

This working, bit by bit, toward the goal is how the Progressives have gotten us into our present strait over these last 80 years, and it’s the only way out of our present strait to fiscal sanity and its associated economic growth and prosperity.  It’s the only path away from government dependency and back to personal responsibility and individual freedom.

Take the budget and vote it up.  Make the spending, taxing, and “entitlement” corrections today that are possible today, rather than failing to get any of it by being greedy for more.  Come back tomorrow, and work then for the next increment.  And by the way, tomorrow’s effort will be informed (for those willing to listen) by the empirical data flowing from today’s reforms, and so tomorrow’s continued reforms can be more efficiently structured and thus produce its results more quickly.  Sort of a dynamic political scoring.