Did the capitial gains tax cut pay for itself?

[southsider2k5]

http://www.nationalreview.com/nrof_luskin/...00601270946.asp

[Mplssoxfan]

Interesting reading. Too bad I probaply won't get to read the whole thing. It appears, if I read this correctly, that Luskin may be guilty of skimming the report himself. Luskin writes:

 

Those are the estimates. Now let’s see how things really turned out. Take a look at Table 4-4 on page 92 of the Budget and Economic Outlook released this week. You’ll see that actual liabilities from capital-gains taxes were $71 billion in 2004, and $80 billion in 2005, for a two-year total of $151 billion. So let’s do the math one more time: Subtract the originally estimated two-year liability of $125 billion from the actual liability of $151 billion, and you get a $26 billion upside surprise for the government. Yes, instead of costing the government $27 billion in revenues, the tax cuts actually earned the government $26 billion extra.

 

CBO’s estimate of the “cost” of the tax cut was virtually 180 degrees wrong. The Laffer curve lives!

 

First, no one I know who has ever studied economics doubts the truth of the Laffer Curve. What is debated is what the ideal marginal tax rate is, that is, what is the marginal tax rate which will maximize revenues. That's a minor point, however. The point I'd like to make regarding Luskin's argument is this: he missed the fine print on Table 4-4.

 

Here's the disclaimer below the table:

 

Capital gains realizations represent net positive long-term gains. Data for realizations and liabilities after 2002 and data for tax

receipts in all years are estimated or projected by CBO. Data on realizations and liabilities before 2003 are estimated by the Treasury

Department.

 

Obviously, the data for 2005 is at least a partial estimate, since all the tax recipts haven't been remitted. The CBO usually gives excellent estimates, but the figures for 2005 are still just that: estimates.

 

A few other musings, gleaned from the bits of Chapter 4 that I read. By far the highest realization of Capital Gains as a percentage of GDP came in the late 90's, according to Fig. 4-4 on page 87. Also, it appears that all the CBO projections are based on the assumption that the tax cuts will not be made permanent. From page 87:

 

Tax Law Changes. Scheduled changes in tax law—principally

from legislation enacted in 2001, 2003, and 2004—

will alter the pattern of receipts growth, especially in

2011 and 2012. The scheduled changes largely tend to

increase receipts. For instance, the tax rates on dividends

and capital gains will rise in 2009, returning to the rates

that existed before 2003. Most important, taxes are projected

to increase sharply in 2011 when, among other

things, statutory tax rates rise, the child tax credit

declines, and tax brackets and standard deductions for

joint filers contract in size to less than twice those for single

taxpayers. Only the phaseout of restrictions on itemized

deductions and on personal exemptions for highincome

taxpayers during tax years 2006 to 2010 will tend

to reduce the growth of individual income tax receipts.

 

Make what you will of it.