Yes, we can.

[Ghoulish Delight]

Originally Posted by Morrigoon

I think 2001-2 could be explained by the bursting of the dot-com bubble and resultant hesitancy to participate in the stock market.

Or how about the fact that, because the tax was reduced, people began selling off investments to take advantage of the lower taxes in 98/99, leaving them with far fewer investments to sell off in 01/02. That's a phenomenon that's been pretty consistent with these kinds of tax cuts, people cash out immediately, temporarily bumping revenue, but really all it does is shift revenue ahead a year or two, leveling out in the following years.

I've posted several stats and links before that show that there is zero evidence for any direct causal relationship between tax decrease and increased tax revenue. There are way too many factors, and way too much variation on the results to even remotely link the two.

[Alex]

Yes, but there are similar economic events coincident with most of the big changes. How do you pick and choose. As is so often said, correlation is not causation.

And why did it only start working in 1987? All of the previous changes in the rate didn't do much to move the revenue unless you are going to say that a rate reduction in 1982 took 5 years before having a major impact while a relatively small rate reduction in 2002 caused an immediately tripling of it. And a big rate increase in 1972-3 did nothing really, but relatively smaller one in 1987 immediately tanked it. There are four spikes in the graph. The first happened when rates went up. The second happened when rates were unchanged. The third peaked two years after they went down but the peak starts before the change. The fourth happens simultaneously.

Or it could be the there is no strong causal connection and that they are just inversely impacted by the same underlying things. I don't know if that is the case. But while the chart seems to indicate an inverse directional correlation it doesn't seem to be consistent in scale and none of that indicates cause. Perhaps when when the revenues go too high that creates political pressure to increase taxes on those who are getting rich in the stock market and so congress does this but since the stock market is somewhat cyclical they generally do this at just around the same time that things start to go south? I have no idea if that is true but it would be a causal link in the opposite direction (success brings to light money that government thinks it can take without outrage so it does). In 2002 you had the dotcom bust which is a not rate possibility for why revenues fell. But in 2000 you had the dotcom boom which would also be a non-rate indicator of why they rose.

While the Wall Street Journal editors obviously accept the causal link you'll find plenty of other economists and market journalists who do not. And of course, it ignores the fact that even if a previous decrease caused an increase that this does not mean that further decreases would do so.

Plus, what if it is just the downward movement that does it, and it isn't so important what the actual rate is? Then this would mean that every once in a while you need to dramatically increase it again, take the short term hit, so that you can go about lowering it in steps again. Just like eventually the Fed is going to have to raise rates back up to 4-5% again otherwise they won't have the stimulus tool of lowering them available (as Japan learned once they hit zero).

[Morrigoon]

Well, that's the hell of economics. There are always multiple unaccounted for factors. Like when the Fed though they'd figured out the relationship between inflation and unemployment back in the 70's. That worked out real well.

(Though again, true to this argument, there are other factors that contributed to runaway inflation in the 70's, like women entering the workforce in droves)

[scaeagles]

My favorite economist, Dr. Walter Williams, on the capital gain tax rate...

Let's talk about capital gains taxes starting out with a few questions for you. Suppose you see a couple highway construction projects.

On one project, the workers are employed using shovels and wheelbarrows. At the other project, the workers are using huge earthmovers, cranes, asphalt-laying machines and other equipment. On which project do the workers earn the higher wage? You'll probably answer, "Those on the project with all the machinery." Now the question becomes, why? Is it because construction company owners like machine operators more? Or, is it because the machine operators have more bargaining power?

The answer to both questions is no. The correct answer is that the workers on the project using all the machinery are more productive. They are more productive because they have much more capital (equipment) working with them. As a result, more road is built per day, per worker, and their wages reflect that higher productivity.

Creating more equipment, whether it's earthmovers, computers or technical innovation, is called capital formation. The capital gains tax is a tax on capital formation, and when anything is taxed, one expects less of it. Less capital formation means a slower growth in wages. Roughly 95 percent of the growth in wages over the past 40 years is explained by the capital-to-labor ratio.

The capital gains tax dampens risk incentive. Put yourself in the place of an investor. You can invest in a utility company that's been earning a six percent rate of return for decades. Alternatively, you can invest in a high-tech, high-risk startup company. While such an investment has a high risk, and you stand to lose all of your money, success can deliver a potentially very high payoff. Capital gains taxes reduce your rate of return on the risk you have taken. Reduced rates of return mean that people will undertake less risk.

The capital gains tax has another debilitating effect on investment that's called the "lock-in" effect. People who have made a capital gain on an investment know that if they were to sell they would have to pay the capital gains tax. Therefore, for tax reasons, they often hold on to that investment longer than they otherwise would. With a reduction or elimination of the capital gains tax, instead of people's decisions being driven by tax considerations, they would focus more of their portfolio to areas in the economy with a higher long-run growth potential.

There is so much more involved in the capital gains tax rates than the pocketing of cash on the sale of assets.

[Alex]

That is true. But if maximizing capital gains (not capital gains tax revenues) is the only goal then the obvious answer is to have zero taxes. And this would apply to pretty much every other form of taxation. Taxes have a suppressing effect.

I wouldn't contest that at all.

However, that is not the same as saying that an increase or decrease in a tax always has the inverse impact on revenues from that tax. Obviously that is not true. Going from 1% to 0% tax will decrease the depressing effect of that tax but it will not increase the revenue of the tax.

I'll happily come closer to your side on the question of whether capital gains should be taxes at all.

[Morrigoon]

Well obviously it would help if they sought the point of maximum benefit, because one expects the benefit to be a curve (or curves).

I can't believe I can't think of the name for that point on the graph, but you know what I'm getting at here. The point at which a movement in either direction would see a decreasing benefit in terms of total tax paid.

[Ghoulish Delight]

Originally Posted by Morrigoon

Well obviously it would help if they sought the point of maximum benefit, because one expects the benefit to be a curve (or curves).

There are 2 problems with that, the first being that there's been no reliable data to determine what that point is, the second being that in all likelihood that point is a moving target.

In other news, Howard Dean is stepping up pressure on Superdelegates to state who they're supporting, which in turn is indirect pressure for Clinton to drop out.

[Morrigoon]

Hmm... CP, GD, anyone, wanna do phone bank for Barack? They've even got a location called "The Lot".

http://my.barackobama.com/page/content/nvp2region6/

I could do Saturday morning, perhaps. As long as they don't mind a registered Libertarian phone banking for them.

[Cadaverous Pallor]

I have considered doing the phone thing for Barack for months now, but I have to bow out. (The site is always asking for volunteers.) I simply do not like it when people call me to support their candidate. It makes me like the candidate less. I can't do it to other people in good conscience, even though it may help.

[JWBear]

Here's something not being reported by the "liberal" (cough, cough) mainstream press.

I'm sure those who think the words of Rev Wright make Sen Obama disqualified to be President will now denounce Sen McCain. It's only fair, after all.