Does raising tax rates on capital gains raise revenue?

[Torie]

Obama has made famous the Buffet rule, which is really a massive tax rate increases on capital gains if you generate enough of them to get into the "soak the rich" zone. It effectively raises the marginal rate on capital gains for these folks from 15% to 30%, exclusive of whatever the states levy (if Jerry Brown in CA has his way, in CA that would be another 13%).  Capital gains are a special category of income, because you take a risk with your investment, can avoid recognition of gain by just holding the asset (and borrowing against it if need be to raise cash), and avoid it entirely if you hang on to the asset until death (as I plan to do with my real estate assets). 

Anyway, Krauthammer and Barone claim no, it won't generate more revenue, it is just populist demogoguery. So I did a google to see what is out there as to what the data might actually reflect, and came up with this article. It seems that the rate on capital gains does not really generate more revenue, although there is a lot of noise in the data due to the variation in how much gain is out there to realize, and the timing games folks play as to when and if to recognize capital gains as capital gains tax rates go up and down. There also may not be enough data points to be very confident in making predictions.

The purpose of this thread is to have a substantive and data based discussion of this issue, as opposed to engaging in ideological rhetoric. So if anyone finds other econometric articles on this topic, I suggest that this thread by the place to put them.

In the meantime, I am surprised the Pubs have not characterized the Buffet Rule for what it really is - a massive tax increase on capital gains. When it comes to other forms of income, the rich pay a 35% marginal tax rate, going up to 39.6% at the end of the year, so the Buffet Rule just isn't applicable to anything but capital gains.

[Torie]

Hasn't the IRS itself admitted when the rate goes down revenues increase?

On capital gains?  I don't know. Find a link Grumps!  Do it now! 

[Torie]

Muon2, it  might be useful to separate capital gains from dividends (both of which get the favorable 15% rate at the moment).  Sure, the rationale for a lower rate for dividends disappears if you gut the C Corp tax rate. However, if you want to adjust your basis for inflation, that rationale applies equally to interest income. Probably the most efficient, is to adjust both for inflation, and tax as ordinary income. However, the revenue loss might be quite large.

As to capital gains recognized from the sale of an asset, I don't see how you can get around the avoidance of recognition issue as rates go up. The issue is just how much avoidance is manifested when. And you have like kind exchanges, and the timing of gains to be offset by losses, and on and on. One thing I do know. If the favorable capital gains rate disappears, then "everybody" with any financial smarts will put all their stock assets in a pension plan, and carry bonds in their taxable account.  That will be another offsetting factor. So in the end, we are down to what the empirical evidence shows as to actual behavior which measures such "elasticities."

Right now, I have most of my equities in a taxable account (broad based index funds that I never sell like the total stock market Vanguard index fund, which generate a minimum of capital gains, since they are passively managed; I just put value/emerging market funds that generate a lot of taxable activity in my pension plan).

Speaking of pension plans, that is the biggest loophole for "the rich" of all. I wonder why team Obama has not gotten around to that issue yet?  He would have a much better case to make there, then this hawking of the Buffet Rule, which beyond everything else, might increase the cost of capital, and reduce future economic growth.

Hey, did you get my email with my most massive matrix chart that I have constructed yet?  It's even bigger than the US deficit as it were.

[Torie]

Remind us why you are not on Capitol Hill, muon?  

Hey, maybe when that burnt out old once dope smoking libertarian hipster who when he got flabby and soft discovered the evils of porn retires, I can run for Congress from my little satrapy (love that jungle primary, where I might get Dems to put me over the top against another Pub, hehe), and join Muon2 in Congress. Maybe we can both get on the Ways and Means Committee, and piss everybody off as we keep demanding data, or attacking data, and so forth. I wonder if they have a rule against smoking pot in the Capitol building.

[Torie]

Try this for starters....... http://www.econdataus.com/cgtax05.html

Nice work Grumps. Alas, there are not enough data points for all of those variables (amount or recognized gain, amount of unrecognized gain (or dear, we don't have that variable on the chart), absolute rate, change of rate, etc.) operating at once I suspect, but that chart cries out for being slapped on a spreadsheet, and the "Regression Analysis" statistical button pushed, which generates a trend line and a coefficient formula like magic.  It is almost as good and magical as electricity in my world.

Another issue to tackle while we are at it, is just how much of the C Corp tax is a tax on capital, and how much of it is passed on in higher product prices, and thus acts as a regressive national sales tax. I want answers to that one too, and I am tired of waiting for them. It is time for gratification. I don't have all that much time left.

[Torie]

Beet, economic theory teaches that adjusted for risk, the cost of debt and equity should be the same. There used to be some chatter that that only applied pre tax, and not after tax, but that chatter has died down. The tax advantages or disadvantages of debt versus equity are priced into expected rate of return, so it's a wash.

It probably should be a law, that everyone has to get an MBA with a major in finance. It isn't that hard a field really.  Law was much trickier, trust me.

Oh the dividend thing.  Tax them enough, and  corps will just buy back their own stock in lieu of dividends, and the shareholders will in exchange, get more share price appreciation. That is why Microsoft never paid any dividends forever and ever, until the tax rate on dividends (income already taxed at the corporate level at 35%, some of which is not recovered in the form of higher prices) was slashed.

[Torie]

If the cost of debt and equity are the same (and they are on a risk adjusted basis, so the more debt you have, the higher the return demanded on the stock), then adjusting the mix does not change the cost of capital. 

My comment on dividends is a mathematical truism. If someone wants some cash, they can just sell a few shares. The result is exactly the same economically.

[Torie]

But I told you the tax deduction bit is passe. Interest rates are higher to offset the negative ordinary tax income that cannot be time or deferred, for the recipients. So the cost of debt and equity are the same pretax, and after tax.

We don't seem to agree on much of anything do we Beet, when it comes to economics? 

[Torie]

By the way, the following is contained in the link you provided:

"The non-partisan Congressional Budget Office (CBO) and the Joint Committee on Taxation have estimated that extending the capital gains tax cut enacted in 2003 would cost $100 billion over the next decade.  The Administration’s Office of Management and Budget included a similar estimate in the President’s budget.

After reviewing numerous studies of how investors respond to capital gains tax cuts, CBO commented that “the best estimates of taxpayers’ response to changes in the capital gains rate do not suggest a large revenue increase from additional realizations of capital gains — and certainly not an increase large enough to offset the losses from a lower rate.”

The Bush Administration Treasury Department examined the economic effects of extending the capital gains and dividend tax cuts.  Even under the Treasury’s most optimistic scenario about the economic effects of these tax cuts, the tax cuts would not generate anywhere close to enough added economic growth to pay for themselves — and would thus lose money."

http://www.cbpp.org/cms/?fa=view&id=1286

Even the Bush administration had to admit that their own policy sucked. That's saying something.

Old stuff. The new number for the Buffet Rule is about 6 billion a year over 10 years (whether that is a static analysis number of a dynamic one, I don't know), which is next to nothing, and if you reduce the corporate rate, and tax dividends the same as interest, it probably erodes down to next to nothing. The Buffet rule only applies to those earning over a million. I consider dividends to be a different animal from capital gains.

[Torie]

I obviously without reading it, cannot comment on the merits of the CBO statement,  or what its assumptions were, etc. I will say this though. You think a doubling of the capital gains tax is a small matter (which is what the Buffet rule does, from 15% to 30%), when it comes to distortions of economic behavior, even assuming that it nets some rather uninspiring amount of revenue after factoring in tax avoidance behavior (and thus the attendant economic distortions)?

[Torie]

You're trying to, to unfortunately use an overused expression, have your cake and eat it too. You can't argue on one hand, that it brings in little revenue so it's insignificant, and second, that it massively alters behavior so it's super-significant. Remember, the tax only affects about 100,000 households; it doesn't even affect the capital gains tax for 99% of the country. But if it did, so what? The capital gains tax rates of the Clinton era hardly represented corporate soul-crushing socialism.

Sure, the economic distortions could be large, leaving the amount of revenue gained small, both at the same time, in fact one causing the other. And no, as compared to the medical subsidies time bomb, getting this wrong, will not end life as we know it - it will just slash a couple of arteries, and leave one bed ridden for a somewhat larger proportion of the year.  But you won't die from it all.

[Torie]

For the time period involved, the chart almost looks like it is almost like a clearance sale. You cut the rates, and short term get a big bump in revenue, and then it goes back down.  Then you raise the rates back up again, so you can slash them again for the next clearance sale. In the end however, it doesn't seem the rate has that much to do with the amount of revenues raised, outside the clearance sale periods.

[Torie]

Torie, any problems with avoidance of the capital gains tax could be eliminated by making it apply upon any gain regardless of whether the gain is 'realized'.

Are you suggesting that all assets be treated as real property? Owners of real property do pay on unrealized gains in the form of property taxes based on assessment.

The use of the word "gain" is confusing, since you have no "gain" until you sell. By the way, "realized" means you book the gain, but don't pay tax on it, e.g. a tax deferred 1031 exchanged. "Recognized" means that you do pay a tax on it, because it is not deferred. Just some technical tax lingo for you. I think what Opebo is suggesting is that you appraise all your assets every year, and if you have appreciation, you pay tax on it. That of course is administratively infeasible. It would be a  nightmare.

[Torie]

So the blue avatars agree we need to raise the estate tax and lower the exemption, eh?

I think there is something fundamentally wrong with being able to sit on your ass and make money, and then pay a lower rate than people who actually have to get their ass up in the morning and go to work. Of course if it's just people who have worked hard all their life to make the money, and then enjoying the fruits of their labor by making money off their investments...fine. But when wealth just goes from generation to generation and due to low estate taxes and capital gains taxes more of it ends up in their hands than it should. I thought we were trying to create a meritocracy here?

What do you think about the mega rich dumping their money into foundations (stripping the government of estate tax revenue) which their scions control, and from which the draw a salary?  t some point, money is about power and prestige rather than consumption.  And then their are our pension plan laws. The Left really isn't focusing on the right places really.  Maybe it is because the mega rich directly and indirectly (via foundations), provide them with a lot of financial resources. Maybe because at the end of the day, Wall Street controls both parties enough, that neither really go to where the bodies are really buried.

[Torie]

That salary would be taxed at more than 15% wouldn't it? Approve.

Also pension plans don't give out that much money. As a whole it does, but most people aren't getting a $100,000 a year, forget about a $1,000,000 a year. Don't really see how that is relevant in this discussion, but that is one place the left can focus on to take these plush benefits away from government workers leaving more to help the poor with. Also agree about Wall Street and money controlling both parties. Yay Citizens v United. I >3 this Supreme court. And as an added bonus, free anal penetration by not just the inmates, but the guards as well in jails and prisons these days. Just awesome.

Well I sock away 55K a year into my pension plan, as an above the line deduction. It's outrageous. I feel guilty every time I punch the number onto my turbo tax return screen - not enough to not punch it in however.

As to the butt sex thing ...