I noted in an earlier post that McCain has claimed that tax cuts increase government revenue (and conversely, increasing taxes reduces government revenue.) This view is clearly false, and when I confronted McCain's chief economic adviser about this at a public forum, he denied that McCain held this view, saying that McCain had mispoke and was being "too blunt."
A couple days ago the Center on Budget and Policy Priorities put together a nice note summarizing why tax cuts lose revenue. This is a good reference for anyone trying to explain why McCain is wrong. A key excerpt:
Given the evidence, economists across the political spectrum reject the notion that tax cuts pay for themselves. They include Edward Lazear, current chairman of President Bush’s Council of Economic Advisers (who told Congress, “I certainly would not claim that tax cuts pay for themselves”) and N. Gregory Mankiw, the CEA chair earlier in President Bush’s administration (who once compared an economist who says that tax cuts pay for themselves to a “snake oil salesman trying to sell a miracle cure”).As it turns out, McCain recently confirmed that he is lying or misinformed about this issue. Here's an excerpt from a July 8 interview with CNN's John Roberts:
ROBERTS: ... Senator McCain says he wants to balance the budget by the year 2013... I check the Center on Budget and Policy Priorities, a non-partisan organization yesterday. They project that by extending the President's tax cuts, which you want to do, and adding in the tax cuts that you're proposing, the deficit for the year 2013 will be somewhere around $439 to $445 billion. So I think it's a fair question to ask, how would you get that number down to zero?The CBPP analysis specifically addressed the narrower question of capital gains taxes:
MCCAIN: Well, first, I suggest you check in with other organizations. But the fact is there's a whole lot of economists, including noble laureates who agree with my plan. We're going to reach restrained spending, we're going to have the economy grow again and increase revenues....
ROBERTS: Actually, I also checked with the Congressional Budget Office and the Center for Budget and Policy Priority numbers were more conservative, they were lower than the CBO's numbers. The CBO's numbers are higher but the number that you have -
MCCAIN: Again, they're static numbers. Not saying that revenues will increase with a strong economy and with low taxes. That's the difference. And I respectfully disagree.
ROBERTS: But Senator, you can't get over the fact, though, that extending the Bush tax cuts, as you want to do, and adding in your tax cuts do take the deficit number from - we actually go from a $70 billion surplus to a $445 billion deficit. So, it's those tax cuts.
MCCAIN: You can't seem to get over the fact that it's spending that's out of control. And you restrain spending and also you can't get over the fact that historically when you raise people's taxes, revenue goes down. Every time we cut capital gains taxes, there has been an increase in revenues.
Capital gains rate cuts, like other tax cuts, lower revenue in the long run. Especially when a capital gains cut is temporary, like the 2003 cut, investors have a strong incentive to realize their capital gains before the old, higher rate returns. This can cause a short-term increase in revenues, as happened after 2003. (Capital gains realizations also went up after 2003 because of the increase in the U.S. stock market. The capital gains tax cut cannot take credit for the stock market recovery, though, since European stocks performed just as well as U.S. stocks during this period.)Kudos to CNN's Roberts for confronting McCain on the fact that his proposed tax cuts which plunge the nation into debt. But next time, please point out that no one, not even McCain's own advisers, believe that cutting taxes will raise revenue.
Over the long run, however, there is virtually no evidence that cutting capital gains taxes spurs nearly enough economic growth to pay for itself. As the Congressional Budget Office recently stated, the “best estimates of taxpayers’ response to changes in the capital gains tax rates 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 lower rates.”