Would a Capital Gains Tax Cut Stimulate The Economy?

[dnalexander]

Below is an article from 2001 the last time Congress was pushing for capital gains tax cuts. Sources sited in the article are Alan Greenspan (Federal Reserve Chairman appointed by Ronald Reagan ), Warren Buffet (Businessman, World's most successful investor, Barrack Obama Advisor), Joint Committee on Taxation (a non-partisan House\Senate Congressional Committee),  Congressional Budget Office (federal agency responsible for government budget calculations and analyses). The full version is quite long but worth reading.

  October 11, 2001
http://www.cbpp.org/9-20-01tax.htm
(full version with footnotes and sources)

   Would a Capital Gains Tax Cut Stimulate the Economy?
by Joel Friedman, Iris Lav, and Peter Orszag

    On September 20, the Center on Budget and Policy Priorities released a report, Would a Capital Gains Tax Cut Stimulate the Economy? The report examines a proposal being promoted by some Congressional leaders to reduce the maximum tax rate on long-term capital gains from 20 percent to 15 percent. While proponents of a capital gains cut have traditionally claimed it would provide long-term (rather than short-term) benefits for the economy, they now argue it will provide a short-term economic stimulus. The proposal, however, would do little for the economy in either the short or the long term while yielding a bonanza for the highest-income taxpayers. The report's findings include:

        * The country's current economic challenges center on short-run difficulties. Most economists believe the underlying fundamentals of the economy remain strong and that the principal problem we face is the prospect of a short-run downturn.

        * Even those who believe that a capital gains tax cut would encourage business investment have previously acknowledged that it is a poor short-term recovery tool because its effects are felt too slowly.

        * A capital gains rate reduction would likely accelerate the collection of tax revenues in the next couple of years, as investors sell more assets to take advantage of the lower capital gains tax rates. These short-term revenue gains, however, would give way to revenue losses in subsequent years — even if the rate cut were only temporary. Lower revenues later in the decade would add to the long-term fiscal burden created by the recently enacted tax cut.

        * These long-term revenue losses could exert upward pressure on long-term interest rates. Federal Reserve Chairman Alan Greenspan has stated that the long-term cost of this year's tax cut has placed upward pressure on long-term interest rates. This is preventing the Fed's rate-reduction policy from being as successful as it otherwise would be in stimulating the economy. Further long-term revenue losses, such as those associated with a capital gains tax cut, would exacerbate this problem.

        * The best evidence from respected neutral analysts such as the Congressional Budget Office indicates that a capital gains tax cut would produce little economic benefit, even in the long run. CBO found that a capital gains tax cut would increase the size of the economy, as measured by the Gross Domestic Product, by about only a couple hundredths of one percent after ten years, an imperceptible change. Similarly, while supporters of a capital gains tax cut often assert that it would spur economic growth by fostering risk-taking, a Congressional Research Service study concluded that "there is no apparent relationship between venture capital investments and the capital gains tax."

        * A capital gains tax cut would provide large tax subsidies to the very top earners who garnered a highly disproportionate share of the recently enacted tax cut. Based on estimates by the Congressional Research Service, it is likely that 80 percent of the benefits of this proposal would accrue to the top two percent of taxpayers, since they pay roughly 80 percent of all capital gains taxes. Taxpayers in this group have incomes exceeding $200,000.

[Wilma]

Personally, I don't think there should be any cut on Capital Gains.  They should be taxed the same as ordinary income.  As for a cut in Capital Gains tax for small business, I am wondering what Capital Gains they have.  Besides, taxing Capital Gains the same as ordinary income would do away with one of the forms needed when filing your income tax and another complicated work sheet for figureing the tax.  Oh, I forgot, most taxes are done by computer now, not with pencil the way I do them.

[srkruzich]

I think businesses should not be taxed.  IF there were no taxes for business, businesses from around the world would
be operating here providing good paying jobs. There would be so many jobs available that you would have to hide under your bed to keep from getting a good paying job.
That would increase disposible income and we could do away with income tax and replace it with a national sales tax. 
then put the Government on a diet and cut their budget by half.   

[Catwoman]

One flat tax.  Irrespective of status. AND GET RID OF THE LOOPHOLES...everyone would pay into Social Security...period.  No more getting to hide income by going deeper into debt.  End subsidies...getting rid of the welfare packages for the special interests would more than fund the unfunded mandates put upon the educational system at the present time. 

[DanCookson]

I don't think there should be a capital gains tax.  Why punish wise patient investors.  This whole idea of taxing business and people making in excess of 250K is absurd.  Hell, 40% of people pay no income tax anyway AND get an earned income credit to make up for the other taxes they pay.

Everyone always wants to talk about jobs.  Not just jobs, but good paying jobs.  There is currently a job for every person that wants to work.  Might not be the job you want or the pay you want, but the jobs are there.  I talk to people every day, and I mean every day, that tell me this exact phrase, "man, if I could just get a couple good people".  How sad. 

But, lets extend unemployment benefits.  That is sure to get people out there back in the workplace.

It was said in an earlier post on this thread to cut business taxes to make it an environment that companies want to build good paying jobs in.  AMEN to that thinking, as it will have to be the growth of our economy that gets us out of this hole we are in, not raising taxes on people who make over 250K.

[Wilma]

Spoken just like a man that makes over $250,000.00.

[DanCookson]

Spoken just like a man that makes over $250,000.00.

No,
Spoken like someone that has a bachelors degree in Applied Economics and Business Administration.

Raising taxes will put less tax money in the coffers because it doesn't reward hard work, it penalizes it.
Has happened every time in the past and will every time in the future.  You don't have to believe me, read a book.

[dnalexander]

Dan's topics are discussed by economists in the full text of the article I posted above I just posted  their quick summary here. Also, in my reading on this subject what I can tell you economists don't agree on this subject. Steve's point of not taxing business is a good one.Up until just a few short years ago Ireland had a small economy. They removed business taxes on profits Their economy has been growing at an extremely fast rate, I believe at around 30% increase per year avg. for the last 5-8 years Many high tech firms moved from the US to Ireland thus moving Ireland into one of the bigger players in the global economy. The topic of taxes is an important one and many peoples eyes glaze over when you start talking about taxes. If people are interested I will add other topics on taxation to this thread. The idea of a "use tax" or "sales tax type system only" as Steve mention has a certain appeal. The use tax too presents it problems just as our current tax system does. For me the issue here is to leave as much money in peoples pockets in the first place. Have a fair tax to everyone, meaning everyone pays taxes. Reduce government waste and tax enough to support only the small government that we need, not the monster we have now. Atleast I know there are other people out there like me who eyes don't glaze over on the topic. You folks are always easy to find.

David

[sixdogsmom]

All this flys in the face of the Clinton administration and the Reagan administration. The first was a productive one for the United States and the latter was repressive. Sales tax would not work; the wealthy would just do their high end shopping elsewhere, taking advantage of the tax breaks overseas. The poor and middle class would be supporting a huge chunk of the tax burden, having to buy locally.

[dnalexander]

SDM I would like to see you support your claim. How would a sales tax drive them to shop outside of the US? They have that ability now and I don't think it accounts for any but the tiniest fraction of the purchases they make. I support buying locally. Also, being the biggest consumers in the world those over seas goods will be coming here and hit with the sales tax. More convenient to pay the tax than it is fire up the jet.
David