Obama vs. McCain on Fiscal Policy
PE 101 Guest Lecture: Non-Powerpoints: August 14, 2008

Thomas Sowell Is the Stupidest Man Alive

Someday the writers of National Review will realize that the incompetence of their economic coverage is one reason for the shredding of their own professional reputations. But that day is not yet.

Thomas Sowell

Thomas Sowell on Obama on National Review Online: The question, incidentally, was why Senator Obama was advocating a higher capital-gains tax rate when experience has shown that the government typically collected more revenue from a lower capital-gains tax rate than from a higher rate.... Economists may say that higher capital-gains tax rates can translate into lower levels of economic activity and fewer jobs, but Obama will leave that kind of analysis to the economists...

Congressional Budget Office:

Congressional Budget Office: Because taxes are paid on realized rather than accrued capital gains, taxpayers have a great deal of control over when they pay their capital gains taxes. By choosing to hold on to an asset, a taxpayer defers the tax. The incentive to do that -- even when it might otherwise be financially desirable to sell an asset -- is known as the lock-in effect. As a consequence of that incentive, the level of the tax rate can substantially influence when asset holders realize their gains, as can be seen particularly clearly when tax rates change.... For instance, the Tax Reform Act of 1986 boosted capital gains tax rates effective at the beginning of 1987. Anticipating that increase, investors realized a huge amount of gains in 1986. Then, in 1987, realizations fell by almost as much, returning to a level comparable to that before the tax increase.... The sensitivity of realizations to gains tax rates raises the possibility that a cut in the rate could so increase realizations... in the short run.... [A] stock of accumulated gains may be realized shortly after the rate is cut, but once that accumulation is "unlocked," the stock of accrued gains is smaller and realizations cannot continue at as fast a rate as they did initially.... The potentially large difference between the long- and short-term sensitivity of realizations to tax rates can mislead observers into assuming a greater permanent responsiveness than actually exists...

Justin Fox:

"Serious" economists and capital gains taxes - The Curious Capitalist - Justin Fox - Economy - Markets - Business - TIME: on this particular topic I tend to rely on professors at fancy universities who have served in the current Bush administration, because I figure it's hard to dismiss their verdict as political. The current consensus of this crowd is pretty well reflected in a 2004 paper by Greg Mankiw, the former chairman of Bush's Council of Economic Advisers, and Matthew Weinzierl, which concluded that "for standard parameter values, half of a capital tax cut is self-financing." That means half of the tax cut is not self-financing--so the overall result of the cut is a revenue loss. And those "standard parameter values" include spending cuts to make up for the revenue loss from the tax cuts. If you simply do as the Bush administration has done, and make no commensurate spending cuts, you get less than half of the tax cut back...

A quibble: without offsetting spending cuts, you get less than zero of the tax cut back. The dynamic revenue loss is greater than the static revenue loss.

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