If you’re not an elitist with a college education that afforded you a good amount of knowledge about statistical or economic principles, then you may believe the hype that Charles Gibson and others are spewing with regard to the capital gains tax rate. Fortunately, I am an elitist with a background in statistics, able and ready to steer my fellow Americans clear of the misinformation regarding this issue.
Some people would like us to believe that a low capital gains tax rate is better for our country because a lower rate actually increases revenues. The Wall Street Journal published this opinion piece supporting the theory that, in statistical terms, there is a negative correlation between the capital gains tax rate and revenues realized.
Mr. Gibson dared to point out this inconsistency, which regularly goes unmentioned in Mr. Obama’s fawning press coverage. But Mr. Gibson also probed a little deeper, asking the candidate why he wants to increase the capital gains tax when history shows that a higher rate brings in less revenue.
The historical data that proponents of this theory cite is neatly displayed for the economically-challenged in a convenient and easy to read graph:
Sit back, cross your eyes and try not to focus on the graph –just like those magic eye puzzles they used to sell at the mall. As you can see, the light blue line that represents the capital gains realizations appears to be low when the dark blue line (capital gains tax rate) is high, and vice versa. Done and done.
Now, let’s look at it with more focus. There is one major feature of this chart that prohibits us from coming to the same conclusion to which Mr. Gibson and the WSJ came. If you look at the periods of time where the tax rate remains unchanged, you’ll notice that the realizations are extremely variable. This should be an immediate red flag that there are other things either compounding the supposed relationship. Consequently, simply saying that revenues are higher when the capital gains tax rate is lower is misleading and likely wrong.
The Curious Capitalist and Bernard Wasow do a very decent job of explaining some of the compounding effects that influenced the illusion of the relationship shown in the graph above. To summarize the economic experts, obvious strategies that influence behavior in the stock market as well as time and the business cycle lend insight to the larger picture. In fact, the only clear relationship is that you would expect an increase in revenues immediately after the rate drops. However, in the long run a lower tax rate appears to depress revenues.
Here is what really bothers me most about that graph, which was supplied by Stategas Research Partners. Strategas was founded by Wall Street investment strategists and economists. One would think that anyone working for a company founded by three men with such shining credentials would be smart enough to realize that the graph shown above is misleading. I would go so far as to label it as intentionally misleading. I could understand if this was the USA Today’s lame attempt at a scoop, but I find it hard to believe that an economic think tank unknowingly supplied the WSJ with a graph that gives people a false impression of the real picture.
What we have here is another case of the wealthy looking to get wealthier. Wasow concluded:
Over the long haul, if we cut capital gains taxes relentlessly, as we did in 2003 following the cuts of 1997, we will depress tax revenue. By the same token, even when tax rates are historically high, as they were in 1995 and 1996, realized capital gains and capital gains revenues will surge as the wealthy stop playing games of asset sale timing and get on with their business.
Returning to Mr. Gibson’s question, it is quite true that revenues rose after the capital gains tax cuts of 1997 and 2003. They also surged in 1995 and 1996 without tax cuts, and they collapsed in 2001 – as they will again in 2008 – because of changes in the underlying economy. It is nonsense to suggest that over the long haul cutting capital gains taxes increases revenues.
The capital gains tax is paid overwhelmingly by the wealthiest people in the United States. They are lucky to be able to present, as facts, in a presidential debate, the propaganda that is marshaled to reduce their tax load.
