In criticizing Sen. Barack Obama's "mindset about taxes," Fox News' Brit Hume said that "when you've lowered [capital gains tax rates] in the past, you get a gusher of revenue, because people go ahead and take their capital gains and the revenues go up." However, in suggesting that cuts in the capital gains tax result in greater revenue, Hume did not note that many economists have challenged the idea that tax revenue increases over the long term as a result of cuts in the capital gains tax rate.
On the October 19 edition of Fox News Sunday, Fox News Washington bureau chief Brit Hume said of Sen. Barack Obama's "mindset about taxes": "He earlier gave us a glimpse of that in the interview he did with [ABC World News anchor Charles] Gibson when he was talking about raising capital gains tax rates. And Charlie pointed out to him that, you know, when you've lowered them in the past, you get a gusher of revenue, because people go ahead and take their capital gains and the revenues go up. And Obama said, yes, perhaps, but, he said, he wanted to do it anyway because it was fairer." Hume appeared to be referring to Gibson's assertion, during the April 16 Democratic presidential debate, that "history shows that when you drop the capital gains tax, the revenues go up." But in suggesting that cuts in the capital gains tax result in greater revenue, Hume did not note that many economists -- including some conservatives -- have challenged the idea that tax revenue increases over the long term as a result of cuts in the capital gains tax rate, as Media Matters for America has repeatedly documented. Indeed, the Joint Committee on Taxation estimated in June 2006 that the 2006 extension of the 2003 cuts on capital gains taxes would result in decreased revenues of $20 billion over 10 years.
For example, addressing Gibson's assertion, Gerald Prante, senior economist for the Tax Foundation, wrote: "Gibson's implying that cutting capital gains taxes raises tax revenues by the mere time series correlation he cited was a stretch. Much of the short-run response to changes in the capital gains tax rate are for tax timing purposes. This is a well-known fact, and it is why [the Congressional Budget Office] projects a huge spike in capital gains collections in 2010 (the last year of the scheduled low 15% rate on long-term gains) and thereby also a large decline in 2011 (when the rate on long-term gains is scheduled to revert to 20%) under current law." According to its website, the Tax Foundation believes that "[t]axes should raise revenue for programs while consuming as small a portion of national income as possible, and should interfere with economic growth, trade and capital flows as little as possible."
As Media Matters also documented, in an article published in the Journal of Public Economics, N. Gregory Mankiw -- former chairman of President George W. Bush's Council of Economic Advisers -- and Matthew Weinzierl asked, "To what extent does a tax cut pay for itself?" Mankiw and Weinzierl concluded, "In almost all cases, tax cuts are partly self-financing. This is especially true for cuts in capital income taxes" [emphasis added]. Discussing those findings in a 2007 blog post, Mankiw noted, "Matthew Weinzierl and I estimated that a broad-based income tax cut (applying to both capital and labor income) would recoup only about a quarter of the lost revenue through supply-side growth effects. For a cut in capital income taxes, the feedback is larger -- about 50 percent -- but still well under 100 percent."
Further, according to the Congressional Budget Office, past changes to capital gains tax rates alone do not necessarily explain even short-term changes in capital gains realizations. From the CBO's 2006 letter to Congress:
The substantial volatility in capital gains realizations makes it difficult to accurately project gains or discern from historical realizations how much taxpayers respond to changes in capital gains tax rates as distinct from their responses to other factors that influence realizations. For example, substantial increases in gains of 40 percent, 25 percent, and 21 percent occurred in the years immediately following the rate reduction enacted in 1997. Those increases might suggest a large behavioral response to the tax rate cut -- except that realizations also increased by 45 percent in 1996, before the rate cut. Thus, changes in realizations are not necessarily the result of changes in taxes; other factors matter as well.
CBO has updated its latest models with available data through 2004. Those models, which incorporate changes in the tax rate, fall well short of explaining the surge in realizations that occurred in 2004. Roughly half of the growth in realizations between 2003 and 2004 remains unexplained. After examining the historical record, including that for 2004, we cannot conclude that the unexplained increase is attributable to the change in capital gains tax rates. Volatility in gains can stem from other factors, such as changes in asset values, investor decisions, or broader economic trends.
From the October 19 edition of Fox News Sunday:
CHRIS WALLACE (Fox News Sunday host): That was Senator McCain on Friday standing by Joe the Plumber, who is now a figure of some controversy in the presidential campaign. And back in Washington, we bring in our Sunday regulars: Brit Hume, Washington managing editor of Fox News; and Fox News contributors Mara Liasson of National Public Radio; Bill Kristol of The Weekly Standard; and Juan Williams, also from National Public Radio. So, folks, Joe the Plumber became a figure, or at least an important symbol, in this presidential campaign. And as we mentioned, Senator McCain went on to mention him 21 times during the final debate this week. Brit, is Joe a good weapon for McCain? Does he raise a question about Obama's policy?
HUME: Oh, no doubt about it, Chris. The McCain campaign is in the place now where it needed something -- something big to happen. I don't know whether the Joe the Plumber phenomenon is something big, but it is something, and the reasons are a couple. One is that the guy was here -- what you have embodied in him is the idea of a blue-collar American worker with higher aspirations -- in his case, the aspirations to own the small business -- the small plumbing company -- for which he works. So, he puts this question to Obama about if he were to own that business and make some serious money for the first time, would his taxes go -- his income taxes -- go up? Then the critical thing happened, which was Obama's answer. And Obama explained to Joe that he wasn't trying to punish his success, he didn't dispute that his income taxes would go up, but he thought things worked better for everybody if you spread the wealth around, which was very telling on Obama because it shows you a mindset about taxes.
He earlier gave us a glimpse of that in the interview he did with Charlie Gibson when he was talking about raising capital gains tax rates. And Charlie pointed out to him that, you know, when you've lowered them in the past, you get a gusher of revenue, because people go ahead and take their capital gains and the revenues go up. And Obama said, yes, perhaps, but, he said, he wanted to do it anyway because it was fairer. In other words, that's another case of using the tax system to equalize Americans -- to spread the wealth around, if you will -- and I think that gave McCain a chance to argue his conservative economic policies against Obama, who kind of let it out what he'd like to do, which is to redistribute the wealth through the tax code.