Steve Chapman offers some interesting observations in a column on Republicans and taxes:
"In the 1980s, a Republican House member, fed up with bipartisan efforts to reduce the budget deficit, denounced Republican Sen. Bob Dole as the "tax collector for the welfare state." Newt Gingrich, who later became House speaker, had captured something essential about the party's mood. It was not against the welfare state. It was just against paying for it...
"Republicans used to argue that keeping taxes down was the only way to restrain spending. But as taxes have been cut under President Bush, spending has soared by 29 percent (after adjustment for inflation). Meanwhile, a $236 billion budget surplus has morphed into a deficit of more than $400 billion.
If we want to cut federal spending, apparently we have to do it directly. And if we don't want to cut spending, the least we can do is pay for it ourselves instead of running up debts for our children to pay..."
Chapman challenges the contention that allowing the capital gains rate to revert to 20% from 15% would reduce net tax revenue rather than increase it:
McCain said it proves Obama "doesn't understand the economy." An editorial in The Wall Street Journal claimed that lower rates yield higher revenues and drew a damning conclusion: "Either the young Illinois senator is ignorant of this revenue data, or he doesn't really care because he's a true income redistributionist who prefers high tax rates as a matter of ideological dogma regardless of the revenue consequences."
You don't have to be a Democrat to doubt that logic. Conservatives regard Obama as a true-blue liberal who itches to expand the size of the federal government. Do they think he would forfeit money to do that just for spite?
As it happens, Obama is the one who is heeding data rather than ideology. Most economists believe that in the long run, the 2003 cut in the capital gains rate reduced revenue rather than raising it. For that matter, even the Bush administration's budget admits as much. Keeping the rate at 15 percent rather than letting it revert to 20 percent, it estimates, would cause a revenue loss of $79 billion over the next decade.
Charts tracking the capital gains rate and revenue from capital gains are often presented as evidence that tax rate and revenue are inversely related, but Chapman counters:
"It's true that rates and revenues may sometimes move in opposite directions. When the rate rose in 1987, capital gains realizations dropped. But there's an obvious explanation for that transitory effect. In 1986, seeing the increase coming, people hurried to cash in capital gains while the rate was low.
It happens that I had some direct experience last Saturday that drives Chapman's point home. I was discussing the sale of some property with my business partner and her husband, an investment banker. When I raised the question of timing, he was clear that it would be best to do the deal this year, rather than wait until next year when the capital gains rate might increase. The deal was going to happen no matter what, but the decisive element in the timing has become the anticipation of an increase in the capital gains rate. I suspect we're not the only ones doing this and this is consistent with Chapman's observations.
Chapman also points out that market distortions occur with a relatively low capital gains rate. This should be obvious, but it seems of no concern to those advocating further reductions in the rate.
"A low capital gains rate hinders the free market by inducing people (especially very wealthy ones) to find ways to take earnings as capital gains instead of ordinary income. In other words, it encourages them to do things that would not make economic sense otherwise. A modestly higher rate would discourage such wasteful avoidance."
Chapman is absolutely correct in his suggestion that the current Republican tax-cutting obsession lacks realism. Advocates for tax reductions are, in too many cases, conflating tax cuts with a shrinking government. The record shows that this approach is not working. If Republicans want to reduce the size of government, the only responsible way to do so is to do it directly. Reducing taxes while increasing spending means that the government's appetite for a share of income will only be that much larger for those left to pay the bills years down the road.
I heard, today, that Republican lawmakers are belligerent in their reactions to Bush's efforts to cut corporate farm subsidies. Many of these Republicans also want to hold down tax rates. If Republicans can't even agree to eliminate this sort of welfare for the wealthy, they are not serious about reducing the size of government or letting people keep their earnings. They're just playing a shell game, duping future generations that never agreed to play this game.
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