Tax Cuts Lead to Great Tax Revenue

[Crazed Rabbit]

It turns out supply-side theory is correct.

According to the Congessional Budget Office, tax cuts of capital gains taxes led to an increase in tax revenue over what was projected, says Investor's Business Daily (http://www.investors.com/editorial/IBDArticles.asp?artsec=16&issue=20060201).
IMPORTANT NOTE: The years mentioned are off by a year. The taxes were cut in 2003, but didn't take full effect until 2004, and the numbers should be for the years 2004-2005. Everything is otherwise correct.
Here's a nice little chart showing the increase:
http://www.investors.com/images/editimg/general020206.gif
That's an increase of over 20%!
The tax cuts not only helped the economy but more than paid for themselves!

Crazed Rabbit

[Devastatin Dave]

Great news, unfortunately you won't hear this on the news because its good news for Bush. Bad news= Bush's fault, good news= don't report it.:furious3:

[Lemur]

The tax cuts not only helped the economy but more than paid for themselves!
Two thoughts:

(1) It would be cool to see more than a single data point about this. Somebody should search and see if there have been any reliable, non-partisan studies of the net effect of capital gains taxes.

(2) As anybody who has studied Macro Econ 101 will tell you, there's an optimum point for pricing/revenue. The I.B.D. article would indicate that the current "price" is too high. But there will also be a price that is too low, and you won't have to go to zero to find it. Again, I wonder if there has been a reliable, non-partisan etc. etc. etc.

Oh, and as for the media, you're absolutely right. The fact that they don't highlight their economic reporting on long-term trends is beyond me. It *must* be an anti-Bush conspiracy! (Dare I say, "Vast, left-wing conspiracy"?)

[Crazed Rabbit]

(2) As anybody who has studied Macro Econ 101 will tell you, there's an optimum point for pricing/revenue. The I.B.D. article would indicate that the current "price" is too high. But there will also be a price that is too low, and you won't have to go to zero to find it.

Certainly. A factor of supply side is that decreasing tax cuts forever will not always increase tax revenue. This is validation for the theory behind supply side. The economy will always increase with less taxes, and that is always good for society, if not for tax revenues.

On a different point, I'd argue that its not the point, nor should it be, of government to collect the maximum amount of taxes possible. But that's another debate.

Crazed Rabbit

[Erebus1101]

Republicans say the evidence supports their case for keeping taxes on investment as low as possible. Democrats contend the economic impact of the tax cuts has been modest and that there's little correlation between investment tax rates and economic growth.

I think democrats have a point. From what I know, it seems that revenues from taxes on capital gains are marginal. Although I am also of the opinion that taxes on cap gains should be as low as possible, the US government shouldn't sell it as a victory. The effects on those tax cuts were predictable. However most economists agree that the US deficit will be a problem in the future and since the gains from the taxes on cap gains are quite low, they won't solve it. The US will still need to balance their budget and to do that they will have to either cut expenses or increase taxes.

[Crazed Rabbit]

The US will still need to balance their budget and to do that they will have to either cut expenses or increase taxes.


The US will need to balance the budget, hopefully sooner rather than later, but will not necessarily need to raise taxes. Indeed, this shows us that decreasing taxees can lead to more revenue. That and cutting excess programs.

The democrats are also wrong (as they so often are) about the economic impacts of tax cuts. Look at the difference between the projected tax revenue after the tax cut and the actual revenue. I would think that the projected revenue was using current investment rates as a guide, coupled with the lower tax rates. But investment rose greatly after the tax cuts, leading to the higher tax revenue.

And tax cuts will always increase economic performance, because it decreases the cost of doing business and/or buying products.

Crazed Rabbit

[Erebus1101]

Tax cuts on capital gains were beneficial, but those are not by far sufficient to resolve US deficit problems and not all taxes behave equally. We are still to see wether tax cuts in other more important areas will be as beneficial as this, and I think they probably won't.
I will try to find out more on this subject later, because I think other countries also tried tax cuts but the results were different in each case.

[Seamus Fermanagh]

Balancing the budget would require more tax revenue and/or less spending.

Problem:

Nobody wants to cut any spending anywhere. Moreover, substantial chunks of the budget are devoted to servicing the debt or "entitlement" programs that supposedly cannot be altered.

Problem:

Nobody wants to tax increases and the segment of society that bears the least burden expects that burden to lessen. Remember, the top 10% of wage earners in the USA pay 63% of the taxes. The bottom 45% or so of wage earners pay little or nothing. Unfortunately, the higher the taxes get on the top 5%, the greater the incentive for that top 5% to become citizens of Monaco or the Caymans and select Chuck U. Farley as their representative to the rest of us.

The revenue system itself is addled and needs a complete overhaul. Moreover, many of the entitlements need to be phased out over the next 50 years so that government can get out of peoples daily lives as much as safelly possible.

AdrianII wasn't too far off with his "reach for my wallet" jibe.

[Tribesman]

Interesting .
The tax cuts not only helped the economy but more than paid for themselves!

Whoopee .
Great news, unfortunately you won't hear this on the news because its good news for Bush.
Woohoo .

It would be cool to see more than a single data point about this. Somebody should search and see if there have been any reliable, non-partisan studies of the net effect of capital gains taxes.

Ahhh someone puts a bit of a spoiler on it .
Hmmmmm.....According to the Congessional Budget Office, tax cuts of capital gains taxes led to an increase in tax revenue over what was projected, says Investor's Business Daily.

I wonder what the Congressional Budget Office says about the data concerning Capital Gains Tax and its usefulness in determining trends is , rather than what the "Investor's Business Daily " says :laugh4: :laugh4: :laugh4:
Don't go getting yourselves too excited about this economic wonder :book: ~;)

[Goofball]

The economy will always increase with less taxes, and that is always good for society, if not for tax revenues.

While I agree with you on most moints in this thread, the above statement is not exactly true. The economy (or the amount of trade, and therefor, profit) being generated will always improve as taxation drops as long as taxation does not drop so low that the government is unable to maintain infrastructure.

If the government stops maintianing roads, for example, trade would certainly take a big hit.

As to lower taxes always being good for society, that is also true only to a certain minimum level. If sufficient taxes are not being levied to fund a police force, I daresay that would not be too great for society.

[Crazed Rabbit]

You do have a point. I was just concentrating on the effects of taxes, and not the benefits of said taxes.

A small level of taxation is necessary for the very basic structure of society; police, a judiciary, roads, etc. But the vast majority of what our taxes pay for don't help the economy.

Crazed Rabbit

[Lemur]

A small level of taxation is necessary for the very basic structure of society; police, a judiciary, roads, etc. But the vast majority of what our taxes pay for don't help the economy.
You seem to be implying that the U.S.A. should cut spending. Well, that's a great idea, and I'm all in favor, so please point me out to the political party capable of doing so.

Neither the Democrats nor the Republicans have demonstrated the spine to make meaningful cuts. In fact, the last five years have been an unmitigated disaster for anybody who believes in smaller government. We either need a third party, or we need a split government again. Both of our major parties have behaved like teenagers with daddy's credit card whenever they've had a lock on the government.

I've heard the starve-the-beast arguments, and I'm not impressed. Show me where it's worked. Please. Please.

[Gawain of Orkeny]

We all feel your pain Lemur.

[Major Robert Dump]

You seem to be implying that the U.S.A. should cut spending. Well, that's a great idea, and I'm all in favor, so please point me out to the political party capable of doing so.

Neither the Democrats nor the Republicans have demonstrated the spine to make meaningful cuts. In fact, the last five years have been an unmitigated disaster for anybody who believes in smaller government. We either need a third party, or we need a split government again. Both of our major parties have behaved like teenagers with daddy's credit card whenever they've had a lock on the government.

I've heard the starve-the-beast arguments, and I'm not impressed. Show me where it's worked. Please. Please.


We could make Congress hourly instead of salaried, and make them use a time clock. That would either save a lot of money or get a lot more work out of the fat bastards, either would suffice

Oh, and treat welfare recipients like people on probation/parole, so they had to take drug tests and stay out of bars.

And stop sending foreign aid to countries that suck

And dismantle Homeland security, since the taxpayers shouldn't have to pay to protect a crappy grocery chain that is union anyway

[rory_20_uk]

"We"? You expect Congress to vote in something to make them work harder? It's the usual problem: those in power have no interest in making their lives harder, just easier.

"Countries that suck" is a bit simplistic.

The UK used to treat poor people like that, or worse. Used to place loads in poor houses to "punish" them. Didn't really help matters.

In your scheme what do you do with those that take drugs, go to bars and are poor? OK, not give them any money, so then what? Send them to jail? In the end you're paying a lot more per person than giving them some welfare!

~:smoking:

[Major Robert Dump]

"We"? You expect Congress to vote in something to make them work harder? It's the usual problem: those in power have no interest in making their lives harder, just easier.

"Countries that suck" is a bit simplistic.

The UK used to treat poor people like that, or worse. Used to place loads in poor houses to "punish" them. Didn't really help matters.

In your scheme what do you do with those that take drugs, go to bars and are poor? OK, not give them any money, so then what? Send them to jail? In the end you're paying a lot more per person than giving them some welfare!

~:smoking:

The "suck" comment was kind of a joke.

the thing about people on welfare not doing drugs has nothing to do with people going to jail, and everything to do with a social worker showing up at the house at 8 am, seeing beer cans discarded on the den table, and saying "oh, you can afford beer, the state doesn't need to feed your kids anymore."


Of course, that means we need need social workers with gonads who wouldnt be intimidated by people bent on keeping their foodstamps while binge drinking and taking bong hits, so the obvious answer is to morph the state departments of human services with the state department of corrections, firing all the little old lady social workers, and giving them all sidearms. I'm telling you, this would work.

And what to do when their kids go without because they drank and smoked away their income? well, if no decent relatives exist to take them, the state adopts them, educates them, feeds them and puts them in job corps, all the while reminding them of how they wouldn't be there if their parents werent. slugs. The cost of that would pale in comparison to the costs of having a few more generations of welfare monkeys all because mamma didn't want to get a job

[rory_20_uk]

Yup, I have to agree with that: if you want to break the cycle, you've got to do it properly: sort out the parents and rehabilitate the kids.

I'd advocate that one needs to be able to support one's children to a base level before one is allowed more than (say) 2. If you're rich have 20 for all I care, but if I'm picking up the tab I have a say.

Social workers are the most annoying thing in my day: trying to twist minor ailments into reasons why someone should jump the housing ladder. As one who can't afford a house I see no reason why they should be given one just because they fell down whilst drunk and dislocated a shoulder... :furious3:

We have as much unemployment and social claimants as society is prepared to finance. I'm personally keen on a lot less...

~:smoking:

[Hurin_Rules]

I'd like to see a bit more on this 'evidence'-- seems a bit weak. You've shown a correlation, but have yet to demonstrate causation.

Consider:


November 9, 2005

ECONOMIC EVIDENCE FOR EXTENDING CAPITAL GAINS
AND DIVIDEND TAX CUTS IS WEAK
By Joel Friedman and Aviva Aron-Dine

In the next few weeks, Congress is expected to consider tax reconciliation legislation that allows for approximately $70 billion in tax cuts between fiscal years 2006 and 2010. The reconciliation bill will likely include extensions of a mix of tax cuts that currently are set to expire at some point during the five-year period that reconciliation covers (2006-2010). A number of these tax cuts, including relief from the Alternative Minimum Tax, are slated to expire in 2005, but other provisions expire in later years. In particular, the capital gains and dividends tax cuts, enacted in 2003, are not slated to expire until the end of 2008.

Proponents of extending the capital gains and dividend tax cuts now, a full three years before they are set to expire, argue that extending these tax cuts is essential for the health of the economy today. They maintain that these tax cuts have been instrumental in producing a strong economic recovery and are behind the recent jump in revenues. Failure to extend these tax cuts now, they contend, could harm investor confidence and derail the economy, particularly as it struggles to deal with the impact of the recent hurricanes.

Yet the economic evidence supporting these claims is quite weak. Much more solid is the evidence that these tax cuts are costly measures that increase the deficit and provide the bulk of their benefits to high-income taxpayers.

The key assertion by supporters of the capital gains and dividend tax cuts is that they have been a driving force behind a robust recovery. Yet the current recovery is far from dazzling. When assessed across a broad range of economic indicators, this recovery is worse than the average recovery in the post-World War II period. In the current recovery, the economy has underperformed in terms of GDP growth and growth of fixed non-residential investment, and its performance has been particularly poor in terms of employment and wage growth. Only in one area — corporate profits — have the results been above average for a recovery.

Given the below-average recovery, there is no reason to believe that the capital gains and dividend tax cuts are crucial to the economy’s health. Further, the issue is not whether to change current law by canceling the tax cuts today. The key question is whether, given the tax cuts’ high cost, action should be taken now to extend them.

The proposed two-year extension of the capital gains and dividend tax cut is sometimes said to cost $21 billion. In fact, the Joint Congressional Committee on Taxation has said that this extension would reduce revenues by $51 billion, with $21 billion of this amount falling within the five-year time frame of the reconciliation bill, and the other $30 billion in cost occurring between 2011 and 2015. Similarly, while a one year extension of the capital gains and dividend tax cuts would cost $10 billion within the five-year time frame of the reconciliation bill, it would reduce revenues by $26 billion by 2015.

Moreover, proponents of this extension are not interested in extending these tax cuts for just another year or two. Their goal is to make them permanent. A permanent extension of the capital gains and dividend tax cuts would cost $162 billion over the next ten years ($189 billion when the added interest costs on the debt are included).

Because these costs would add to deficits, they would have a negative impact on long-term economic growth that would mitigate and most likely outweigh any positive impact these measures might otherwise have. The Congressional Research Service has concluded, for instance, that making the dividend tax cut permanent would likely harm long-run economic growth if it is deficit-financed.

Finally, the benefits of extending these tax cuts would go overwhelmingly to high-income households. According to the Urban Institute-Brookings Institution Tax Policy Center, more than half — 53 percent — of the benefits of capital gains and dividend tax cuts in 2005 will flow to the 0.2 percent of households with incomes over $1 million. Three-quarters of the gains are going to the 3.3 percent of households with incomes over $200,000. Some 90 percent of the gains are going to households over $100,000.

At the very least, the economic case for acting now to extend the dividend and capital gains tax cuts could make sense only if two conditions were met. First, the positive consequences of the tax cuts’ long-run impact on investment would have to outweigh the negative consequences of their long-run impact on deficits. Second, the tax cuts would have to have short-run effects that necessitated their immediate extension. With the evidence for both of these claims extremely weak, there is no compelling economic rationale for extending the tax cuts in the forthcoming reconciliation bill. Doing so would provide another unaffordable tax break to those who are already very well-off, while further adding to the deficit.



Economic Effects of Capital Gains and Dividend Tax Cuts
Theoretically, capital gains and dividend tax cuts could boost economic growth in two ways. First, by increasing the after-tax return on investment, they could promote investment and saving. Second, they could improve the efficiency of corporate financing decisions and reduce distortions that deter investment in the corporate sector. Supporters of extending the capital gains and dividend tax cuts claim that such economic gains have, in fact, materialized and that the 2003 tax cuts, along with those enacted in 2001, have led to strong economic growth in the past few years.

Evidence Points to a Weak Recovery

Data on a wide range of economic indicators indicate, however, that growth during the current economic recovery (which began in November 2001) has not been especially robust. GDP, consumption, investment, net worth, employment, and wages and salaries have all risen less rapidly than their average rates of growth during comparable periods of other post-World War II recoveries. Corporate profits have increased dramatically, but those gains have not translated into high GDP growth rates, nor have they led to improvements in the economic well-being of most Americans. Workers have fared poorly, with employment and wage and salary growth well below historical norms.[1]

The weakness of investment growth casts particular doubt on tax cut boosters’ claims. Reducing tax rates on capital gains and dividends increases the after-tax return on investment, which is supposed to increase investment and thus spur growth. But fixed non-residential investment — investment in non-residential buildings, equipment, and software — has grown at an average annual rate of 3.8 percent during this economic recovery, as compared with an average 6.4 percent growth rate in past recoveries.[2] In addition, investment growth has been slower in this recovery than during the recovery of the early 1990s, which occurred in years following a significant tax increase.

Also notable, personal savings rates have continued their general pattern of decline since the tax cuts. As many economists have observed, efforts to increase personal savings by reducing tax rates on capital income (whether by cutting tax rates on capital gains and dividends or by introducing new tax-preferred savings accounts) have so far proven ineffectual. This further undermines the argument that capital gains and dividend tax cuts should be extended to promote saving and investment.

Little Evidence Yet of Economic Efficiency Gains

The available data do not support claims that cutting capital gains and dividends taxes has led to exceptional economic performance. There also is reason to doubt claims that these tax cuts have greatly enhanced economic efficiency in ways that would yield positive economic effects over the long run.

The theory behind the dividend tax cut was that by reducing the “double tax” burden on dividends (which can result because dividends can be taxed at both the corporate and shareholder levels), this tax cut would reduce the difference in tax rates on different forms of investment. That would diminish distortions that deter corporate sector investment and cause corporations to rely too heavily on debt financing, thereby enhancing the efficiency of investment decisions and boosting the economy.

Economists disagree, however, about the extent to which lowering dividend taxes actually improves the efficiency of investment decisions, rather than simply providing windfall gains to shareholders.[3] A study of the 2003 tax cut by economists Alan Auerbach and Kevin Hassett found some evidence for the view that dividend tax cuts do not affect investment decisions.[4] Hassett commented at a recent American Enterprise Institute forum that the study implied it was “not likely that tinkering with the dividend tax rate will have much effect on investment.”[5] Similarly, in a study of British firms’ responses to 1997 dividend tax changes, economists found evidence of changes in dividend pay-outs but “no evidence of any change in investment behavior,” a conclusion that undermines claims that dividend tax cuts improve investment decisions and make the allocation of investment capital more efficient.[6]

Even economists who believe that dividend tax cuts can enhance efficiency typically estimate that the resulting effects on economic growth would be small. [7] Moreover, to the extent that there are potential efficiency benefits from changing dividend and capital gains taxation, the capital gains and dividend tax reductions enacted in 2003 were poorly designed to capture them. Not only did the tax measures provide windfall gains for investments that had already been made, but they failed to take steps to ensure that all corporate income is taxed at least once, instead allowing corporations to use loopholes to avoid taxation of some income entirely.

It also is important to distinguish between behavioral responses to the tax cuts in the short run and their potential impact on the economy over the long run. Reductions in tax rates, particularly if they are temporary, are likely to encourage investors and companies to act in ways that maximize their tax benefits. If they are perceived to be temporary, the reaction can sometimes be even larger. Not surprisingly, several studies have found that some companies increased dividends, or started to pay new dividends, in response to the dividend tax cut. What is not clear, however, is whether these dividend payments will have the desired effect on the economy. Their economic impact would be muted if, as some studies suggest, many of the newly initiated dividend payments are in the form of one-time dividends rather than regular dividends, or if firms have simply substituted dividend payments for other forms of shareholder compensation, such as share repurchases.[8]

Similarly, investors may accelerate the realization of capital gains (i.e., the sale of stocks or other assets that produce capital gains) to ensure that they can take advantage of the lower capital gains tax rate while it is in effect (since the lower rate might not last). Such timing decisions have no significant effect in boosting the economy. Increases in capital gains realizations can have some impact on revenues in the short run, and the added revenue from a short-term increase in realizations may temporarily outweigh the revenue losses from a reduction in capital gains rates. But this should not be confused with improving the economy. Whether behavioral reactions translate into improvements in the economy will depend on whether funds are reinvested in more productive areas and (as discussed below) whether any gains from a more efficient allocation of investment capital outweigh the economic harm that results from the increase in deficits that these tax cuts cause over time.

Borrowing to Pay for Tax Cuts Undercuts Their Positive Effects

Studies show that the contribution of the capital gains and dividends tax cuts to higher deficits is likely to mitigate, and possibly outweigh, any of the positive effects the tax cuts would otherwise have on the economy. All else being equal, deficits lower national saving, thus lowering national investment and long-run economic growth.

The Joint Committee on Taxation estimates that the capital gains and dividend tax cuts enacted in 2003 will cost $148 billion between 2003 and 2010. Extending these tax cuts through 2009 would cost an additional $26 billion; extending them through 2010 would cost an additional $51 billion. When the added interest costs are included, the total increase in the deficit that would result from extending these tax cuts would be $35 billion (for an extension through 2009) and $68 billion (for an extension through 2010).

The Congressional Research Service has analyzed the 2003 dividend tax cut under a variety of assumptions and concluded that, in the long-run, “the dividend relief proposal would harm long-run growth as long as it is based on deficit finance” (emphasis added).[9] Similarly, Brookings Institution economists William Gale and Peter Orszag concluded that even if the more optimistic assumptions about the positive effects of the dividend and capital gains tax cuts on the economy proved accurate, as long as these tax cuts continued adding to the deficit, “the net effects would be roughly a zero effect on long-term growth.”[10]

In a detailed new study, Gale and Orszag emphasize the importance of incorporating tax cuts’ contributions to deficits into estimates of their effects on the economy. Many previous analyses of the effects of tax cuts on the economy included the assumption that the cost of the tax cuts would be offset and would not add to the deficit; these analyses concluded that tax cuts can encourage investment. Gale and Orszag show, however, that if it is instead assumed that tax cuts add to the deficit, the resulting increase in interest rates will undermine or overwhelm the positive economic effects of the tax cuts.[11] In other words, capital gains and dividend tax cuts that are not paid for, and thus increase the deficit, have the potential to reduce investment once the negative effects of higher interest rates are taken into account.



Extending the Tax Cuts in the Wake of Katrina

Many of the arguments for extending the 2003 tax cuts focus on short-term, rather than long-term, economic considerations. Senate Finance Committee Chairman Charles Grassley has suggested that extending the capital gains and dividend tax cuts is important in the wake of Hurricane Katrina because, “I would think in a time when we have some question about the ripple effect of what happened with Katrina affecting the whole economy of the United States, you don’t want to do anything to discourage investment in America.”[12] The fear is that a failure to extend these tax cuts could depress investor confidence and derail the economy.

As discussed above, however, the evidence that the capital gains and dividend tax cuts have had a significant positive impact on the economy is weak. Further, if capital gains and dividend tax cuts were to affect economic growth positively, the effects would primarily be felt over the long term, not the short term. In short, the argument that the recent hurricanes necessitate action now to extend the capital gains and dividend tax cuts beyond 2008 does not withstand scrutiny.

Some may still argue that failing to extend the capital gains and dividend tax cuts now would damage the economy by depressing investor confidence, even if the tax cuts themselves have little impact on growth. But one must question the wisdom of extending costly tax cuts on the basis of nebulous claims about effects on investor confidence. Furthermore, unpaid for tax cuts that worsen deficits could lower investor confidence and increase the expectation of higher interest rates and taxes in the future, thus deterring investment.

Concerns about negative effects on the stock market may be especially overblown. A recent Tax Policy Center study indicates that capital gains tax rates and stock market values are only weakly correlated. It concludes that “capital gains tax rates can increase significantly, as they did following the 1986 Tax Reform Act, and have little apparent effect on the stock market” (emphasis added).[13] There is some evidence that the dividend tax cut pushed up stock prices. But to the extent that the tax cut was perceived to be temporary, failure to extend it now, three years before it is due to expire, would not be expected to greatly affect stock values. Moreover, according to the Congressional Research Service, appreciation in stock values after a dividend tax cut indicates that the tax cut is providing windfall gains to shareholders, rather than encouraging new investment. [14]

Do These Tax Cuts Pay for Themselves?

Extending the capital gains and dividend tax cuts would be costly. According to the Joint Committee on Taxation, a two-year extension of these tax cuts would cost $51 billion through 2015; making these tax cuts permanent would cost $162 billion through 2015. Despite these estimates, some proponents of these measures downplay the costs, suggesting these tax cuts have the ability to increase revenues and citing the recent uptick in federal revenues in 2005 as evidence. The implication is that there is no need to worry about the contribution of these tax cuts to deficits because these tax cuts “pay for themselves.”

Although these and other tax cuts can sometimes increase revenue in the short run, when investors temporarily change their behavior to take advantage of a lower tax rate, these higher revenues are not sustained over time. The historical record shows that tax cuts — including capital gains and dividend tax cuts — have consistently lost revenue.

The following table shows the effect of the tax cuts enacted in 2003, of which the capital gains and dividend tax cuts are the centerpiece. It compares the actual levels of revenue in 2003, 2004, and 2005 with the “predicted” levels of revenue. The predicted levels equal Office of Management and Budget revenue projections at the start of 2003 that do not include the effects of the 2003 tax cuts, as reduced by the Joint Committee on Taxation’s estimates of the revenue losses from the tax cuts that have been enacted since that time.

As the table indicates, the Joint Committee’s estimates of the amount of revenue that these tax cuts would lose have proved to be fairly accurate. If tax cuts for investment had generated large revenue and economic gains, revenues would have been well above the predicted levels. Instead, revenues over the past three fiscal years have been $316 billion lower than what OMB predicted they would be without these tax cuts (or relatively close to the $289 billion revenue loss that the Joint Committee predicted).

In other words, the capital gains and dividend tax cuts have lowered revenues and increased deficits. The bottom line is that an extension of the capital gains and dividend tax cuts would lose further revenue and contribute to still-higher deficits, thereby likely harming — rather than improving — long-term economic growth.

Revenue Losses From Tax Cuts Materialize as Projected
(billions of dollars)


2003
2004
2005
Three-Year Total

OMB Projection in January 2003
1,867
2,031
2,235
6,133

Actual Revenue Collections
1,782
1,881
2,154
5,817

Difference
-85
-150
-81
-316







JCT Projection of Revenue Loss
-53
-132
-104
-289



In a recent study, the Economic Policy Institute evaluated the effects of the actual expiration of another investment tax cut, the “bonus depreciation” tax cut enacted in 2002. EPI found little difference in investment behavior before and after this tax cut expired.[15] This is the latest example showing that the impact of tax cuts on business confidence and decision-making may be less than advocates of such tax cuts often claim.

The Distribution of Capital Gains and Dividend Tax Cuts
While there may be uncertainty about the economic impact of capital gains and dividend tax cuts, there is no question about who benefits from them. The benefits of these tax cuts flow overwhelmingly to those with the highest incomes.

In 2005, some 53 percent of the benefits of the dividend and capital gains tax cuts will flow to the 0.2 percent of households with incomes over $1 million, according to an analysis by the Urban Institute-Brookings Institution Tax Policy Center. These households will receive an average tax cut from these measures of nearly $38,000 in 2005. (These tax-cut benefits are in addition to the generous gains that such high-income households are receiving from other tax cuts enacted since the start of 2001.)

The Tax Policy Center data also show that households with incomes over $200,000 will receive more than three-quarters of the dividend and capital gains tax-cut benefits. Households with incomes above $100,000 will receive 90 percent of the benefits. Only 10 percent of the benefits of the dividend and capital gains tax cuts will flow this year to the 86 percent of households with incomes under $100,000.

Supporters of these tax cuts may try to argue that the benefits are more widespread, pointing to the growing number of families that own stock. But despite this growth, stock ownership remains highly concentrated at the top of the income spectrum. Furthermore, high-income households are much more likely to hold stocks in taxable accounts than are middle-income families, who hold a larger share of their savings in retirement accounts that are not subject to tax and thus are not directly affected by capital gains and dividend tax cuts. Data from the Federal Reserve’s 2001 Survey of Consumer Finances show that households in the top five percent of the income spectrum own nearly 60 percent of all stocks held in taxable accounts.



Conclusion
Advocates of extending the capital gains and dividend tax cuts are proposing an expensive, deficit-increasing tax break primarily for wealthy investors while failing to demonstrate that the tax break’s benefits outweigh its costs. Evidence on the economy’s recent performance and on firm responses to dividend tax cuts provides little if any indication that the tax cuts have contributed either to short-run economic growth or to long-run economic efficiency. The negative economic consequences of increasing deficits, by contrast, are clear. Given these considerations, extending the tax cuts now would be an irresponsible decision – especially when viewed alongside program cuts currently being debated in Congress that would significantly burden low- and moderate-income households.


--------------------------------------------------------------------------------

End Notes:

[1] For detailed comparisons between this and other recoveries and an explanation of the methodology used, see Isaac Shapiro, Richard Kogan, and Aviva Aron-Dine, “How Does This Recovery Measure Up?” Center on Budget and Policy Priorities, August 9, 2005, available at http://www.cbpp.org/8-9-05bud.pdf.

[2] Total investment has also grown more slowly in this recovery than in other recoveries. Fixed non-residential investment is highlighted because it is considered a better indicator of the nation’s stock of productive capital, changes in which significantly affect prospects for economic growth over the long term.

[3] For discussion of theories of how dividend tax cuts affect investment (in the context of the 2003 tax cuts), see Alan Auerbach and Kevin Hassett, “The 2003 Dividend Tax Cuts and the Value of the Firm: an Event Study,” OTPR/Burch Center Conference, May, 2005. http://emlab.berkeley.edu/users/auerbach/03divtax.pdf.

[4] Alan Auerbach and Kevin Hassett, “The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study.”

[5] Kevin Hassett, Presentation at American Enterprise Institute Forum, “How Did Firms Respond to the Dividend Tax Cuts?” November 8, 2005.

[6] Stephen Bond, Michael Deveruex, and Alexander Klemm, “Dissecting Dividend Decisions: Some Clues about the Effects of Dividend Taxation from Recent UK Reforms,” Institute for Fiscal Studies, June 27, 2005, http://www.ifs.org.uk/wps/wp0517.pdf.

[7] Former CEA Chair Glenn Hubbard suggested in a speech at the American Economic Association in January 2004 that gains resulting from the tax cuts’ effects on the allocation of investment would raise the long-term level of GDP by 0.2 percentage points. Cited in William Gale and Peter Orszag, “Bush Administration Tax Policy: Effects on Long-Term Growth,” Tax Notes, October 18, 2004.

[8] For further discussion of these issues, see Joel Friedman, “Dividend and Capital Gains Tax Cuts Unlikely to Yield Touted Economic Gains: Benefits of these Tax Cuts Flow Disproportionately to the Well-Off,” Center on Budget and Policy Priorities, revised October 7, 2005, http://www.cbpp.org/3-10-05tax.pdf.

[9] Jane Gravelle, “Dividend Tax Relief: Effects on Economic Recovery, Long-Term Growth, and the Stock Market,” Congressional Research Service, March 28, 2003.

[10] William Gale and Peter Orszag, “An Economic Assessment of Tax Policy in the Bush Administration, 2000-2004,” Boston College Law Review, Vol. 45, No. 4, 2004.

[11] William Gale and Peter Orszag, “Deficits, Interest Rates, and the User Cost of Capital: A Reconsideration of the Effects of Tax Policy on Investment,” Urban-Brookings Tax Policy Center, August 19, 2005.

[12] Associated Press, “GOP Tax Cuts Delayed by Katrina,” September 14, 2005.

[13] Troy Kravitz and Leonard Burman, “Capital Gains Tax Rate, Stock Markets, and Growth,” Tax Notes, November 7, 2005, available online at http://www.urban.org/UploadedPDF/1000851_Tax_Fact_11-7-05.pdf.

[14] CRS noted, “a belief in a large permanent effect on the stock market is only consistent with a belief that there is little to gain in efficiency effects from dividend tax relief.” Jane Gravelle, “Dividend Tax Relief: Effects on Economic Recovery, Long-Term Growth, and the Stock Market.”

[15] Lee Price, “The Boom that Wasn’t.”

http://www.cbpp.org/11-9-05tax.htm

[Slyspy]

Whoa that was a crazily long quote. I suggest a link next time, with a little summary by yourself.

[Seamus Fermanagh]

Whoa that was a crazily long quote. I suggest a link next time, with a little summary by yourself.

I disagree. Having the argument laid out with sources attached is a good way to assess them. Most of these economists/tax attorneys hale from left-leaning backgrounds, which is important in evaluating their interpretations of the data. Having the whole piece to judge makes for a better evaluation.


It is patently obvious that most of the gains from tax-cuts are going to the wealthiest Americans. I'd be stunned were it otherwise, since they're the ones paying the lion's share of the taxes as it stands. I do disagree with the sub-text implication that such individuals do not deserve a tax-cut.

When the bottom third of wage earners consume more than 40% of the monies spent on government services while providing only 10% or so of the funding for them, it is difficult to view the current system of taxation as anything but an effort at social engineering (or, if you are a cynic, as a means to keep incumbents in office by buying off voters).

Moreover, capital gains taxes are, ultimately, paid by individuals, not by the "greedy corporations":rolleyes2: since any corporation routinely passes along taxes to consumers as costs or to investors as reductions in dividend.

TANSTAAFL.

[Slyspy]

I disagree. Having the argument laid out with sources attached is a good way to assess them. Most of these economists/tax attorneys hale from left-leaning backgrounds, which is important in evaluating their interpretations of the data. Having the whole piece to judge makes for a better evaluation.


It is patently obvious that most of the gains from tax-cuts are going to the wealthiest Americans. I'd be stunned were it otherwise, since they're the ones paying the lion's share of the taxes as it stands. I do disagree with the sub-text implication that such individuals do not deserve a tax-cut.

When the bottom third of wage earners consume more than 40% of the monies spent on government services while providing only 10% or so of the funding for them, it is difficult to view the current system of taxation as anything but an effort at social engineering (or, if you are a cynic, as a means to keep incumbents in office by buying off voters).

Moreover, capital gains taxes are, ultimately, paid by individuals, not by the "greedy corporations":rolleyes2: since any corporation routinely passes along taxes to consumers as costs or to investors as reductions in dividend.

TANSTAAFL.

On the contrary, links act as interactive footnotes. An overview of the postion should be used, with footnotes linking to supporting sources of information. For example you should have provided links to the statistic which you have used. I would also note that while increased consumer costs may pass the cost on to the public as a whole the same cannot be said for reduced dividends.

[solypsist]

if the tax cuts were such a good thing and brought in all this extra money, then why are all those programs getting slashed from the budget? Shouldn't the gov't be able to afford them now?

[Watchman]

It is my understanding that the wealth distribution pattern in the US overall follows Third World lines - massive concentration in the hands of the minority at the top, and very little amongst the large underclass. Two triangles, one standing on its tip. It is only natural that this sort of distribution leads to the top layers paying the majority of the taxes - even with a flat tax rate, they just plain have the most to tax while the multitudious destitute at the bottom of the heap simply don't have much anything that can be taxed.

That said, I'm not all that convinced this increase in revenues is due to the "wise fiscal policies of the current adminstration" so much as of general conjecturals of the economy - all governements and their supporters after all earnestly try to take the credit for good things and deflect the blame for bad ones, even when they didn't necessarily have anything to do with them.

[Hurin_Rules]

With all these great new revenues, the Bush administration has just released its budget for the coming year:

Guess what? It's the largest budget deficit in history, at $423 Billion:

http://news.bbc.co.uk/2/hi/business/4686684.stm

[Watchman]

Ah. Priorities.

[Crazed Rabbit]

if the tax cuts were such a good thing and brought in all this extra money, then why are all those programs getting slashed from the budget? Shouldn't the gov't be able to afford them now?

Just because the government has the money doesn't mean it should be paying for every program some bum wants. And the capital gains tax revenue increases can't suppor thte whole federal budget.


It is my understanding that the wealth distribution pattern in the US overall follows Third World lines - massive concentration in the hands of the minority at the top, and very little amongst the large underclass.

That understanding would be wrong. The USA has a huge middle class- one that would increase if useless regulations and social programs that kept people stuck in poverty were done away with.


With all these great new revenues, the Bush administration has just released its budget for the coming year:
Guess what? It's the largest budget deficit in history, at $423 Billion:

It would appear that Bush is not exactly a fiscal conservative. Color me surprised.

The important thing, as budgets don't really have a place in this discussion, is that tax revenues went up when taxes went down. What Bush is doing with the budget is irrelevant to that fact.

Crazed Rabbit

[Hurin_Rules]

Ah. Priorities.

I believe the US now spends slightly more than half (51%) of its budget on the military.

[Watchman]

My point exactly. And God only knows how much of that trickles off into accounts it should have no business in along the way.


That understanding would be wrong. The USA has a huge middle class- one that would increase if useless regulations and social programs that kept people stuck in poverty were done away with.Not according to the charts I've seen over the years. The typical First World income-distribution scheme is roughly shaped like () - large and prosperous middle class, hence most of the total wealth in the middle part. The American ones invariably looked much more like the /\ \/ two-pyramid scheme characteristic of the Third World - large, poor underclass, extremely rich top layer.

As for "useless regulations and social programs that kept people stuck in poverty", stuff it. We've had those in abundance for decades over here and what *that* led to is virtual 100% literacy rate, at one brief point the virtual elimination of true poverty, and more prosperous middle class than you can shake a stick at. Heck, all those "useless social programs" were a major helper when people climbed the hill from poorly educated working stiffs to reasonably-comfortable middle-classers...
That your social security system is crap (which by all accounts the American one is) does not mean they all are, or have to be.

[Xiahou]

I believe the US now spends slightly more than half (51%) of its budget on the military.Not even close.


if the tax cuts were such a good thing and brought in all this extra money, then why are all those programs getting slashed from the budget? Shouldn't the gov't be able to afford them now?This year's budget is still bigger than last year's.

[Hurin_Rules]

Not even close.


Here are the sources:

http://72.14.207.104/search?q=cache:CQxxuIJfyzEJ:www.warresisters.org/piechart.htm+us+budget+military&hl=en&gl=ca&ct=clnk&cd=7

What are your figures?

BTW, to put it in perspective, the US accounts for approximately half of all the military spending in the world:

http://72.14.207.104/search?q=cache:fmjs6Oo4hAEJ:en.wikipedia.org/wiki/United_States_Armed_Forces+us+budget+military&hl=en&gl=ca&ct=clnk&cd=5

Also, US military spending now accounts for more than half of all discretionary spending in the US budget(they were just discussing this on CNN, how discretionary defense spending has now hit a new high).

[Xiahou]

Here are the sources:

http://72.14.207.104/search?q=cache:CQxxuIJfyzEJ:www.warresisters.org/piechart.htm+us+budget+military&hl=en&gl=ca&ct=clnk&cd=7

What are your figures?

BTW, to put it in perspective, the US accounts for approximately half of all the military spending in the world:

http://72.14.207.104/search?q=cache:fmjs6Oo4hAEJ:en.wikipedia.org/wiki/United_States_Armed_Forces+us+budget+military&hl=en&gl=ca&ct=clnk&cd=5

Also, US military spending now accounts for more than half of all discretionary spending in the US budget(they were just discussing this on CNN, how discretionary defense spending has now hit a new high).
First of all, I have some problems with your sources- not the least of which being, they're talking about the 2006 budget, not the 2007.

My figures can be arrived at very simply...

The budget submitted is for 2.77 trillion dollards, of which 439.3 billions is for the DoD. Simple math 493.3/2770=0.1780 Or, rounded up, 18%. link (http://www.washingtonpost.com/wp-dyn/content/article/2006/02/04/AR2006020401179.html)

So, I'd rather go with the numbers from the Washington Post than massaged numbers from a previous year dredged up by some anti-military site.

[Hurin_Rules]

First of all, I have some problems with your sources- not the least of which being, they're talking about the 2006 budget, not the 2007.

My figures can be arrived at very simply...

The budget submitted is for 2.77 trillion dollards, of which 439.3 billions is for the DoD. Simple math 493.3/2770=0.1780 Or, rounded up, 18%. link (http://www.washingtonpost.com/wp-dyn/content/article/2006/02/04/AR2006020401179.html)

So, I'd rather go with the numbers from the Washington Post than massaged numbers from a previous year dredged up by some anti-military site.

But that simple math omits several things. Firstly, it omits much of the spending that will be necessary for the campaigns in Iraq and Afghanistan. This looks like it will be over $100 billion, and perhaps significantly more. It also leaves out $70 billion in veteran's benefits, and the vast outstanding expenses from past wars (represented as a percentage of the national debt).

[Xiahou]

So that makes it over 51%?

[Hurin_Rules]

So that makes it over 51%?

Yes.

48% is one estimate, another I've seen is 53%. Those seem a bit on the high end. But 20% is only the new payments, and does not include the other costs I mentioned (benefits, Iraq, etc.) that the government will be obliged to lay out this year.

So yes, I stand by my statement.

[Xiahou]

Let's do this again- taking your new numbers for granted.
493+100+70=663\2770 = 0.239

So even with that, it's well less than half your original figure.


So yes, I stand by my statement.
Me too.

Not even close.