What gains from cap gains?

Justin Fox takes issue with Charlie Gibson:

GIBSON: But history shows that when you drop the capital gains tax, the revenues go up.

I've left out Obama's responses, which were mostly about fairness 'n' stuff, because he failed to give the only appropriate answer, which was that, no, history doesn't show that. Yes, capital gains tax cuts invariably result in a revenue increase the next year, because investors aren't idiots: If they see a cut coming, they're likely to delay capital-gains-generating transactions until after the tax rate drops. But I don't know of any serious economist who thinks that cutting the capital gains tax rate increases revenue over time.

Gosh, I hate to defend either Fox News, or supply-siderism. But this is not the same kind of craziness as claiming that massive marginal income tax cuts raise revenue. Optimal tax theory pretty much hates capital gains taxes because they, as their very name suggests, impede capital formation. Also, capital is much more mobile than labor, which is why countries like Sweden focus their taxation on incomes. In fact, when I look at the graph he posts, it seems to tell me a very different story than it is telling him.


By 2007, capital gains revenues had nearly returned to their 2000 highs in real dollars, even though the indexes hadn't regained their previous (real and/or nominal) heights. When you consider that the capital gains revenues in 2000 were coming off nearly 20 years of uninterrupted growth, this in fact suggests that the capital gains tax raised revenues. Moreover, the inflection point is at the time of the cut to 15%, with revenues marching steadily upward thereafter.

Now, I'd be the last person to suggest that correlation is causation--I'm only pointing out that if they didn't raise revenues, you couldn't prove it by this graph. Moreover, there is a not-ridiculous argument that over the long term--five, ten years--they do raise revenues, by spurring capital formation and economic growth. This is very different from the supply sider argument that you could jam personal income tax rates to 1% and enjoy higher tax revenues therefrom.