The following is from an email from Richard Serlin:
In a primary debate last April Charles Gibson implied that capital gains tax cuts are essentially costless, or even make money for the government. Quoting Gibson,"...in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?"Obama was not prepared for this question. He just said it depends on the stock market, but the real answer is that the question was deeply misleading because investors decide when to take capital gains, and when the tax rate drops they all rush to take them then, so in the short run capital gains tax revenues may go up, but in the long run, and overall, they will go down. In addition, wealthy executives will tend to have earnings shifted to capital gains, raising capital gains tax revenue, but decreasing income tax revenue by more. I have a brief article on this at: http://works.bepress.com/
Berkeley economist Brad DeLong has also written on it at:
I hope someone can inform Obama on this, so he and the Democrats don't get hurt on this if it's asked again in a debate with McCain.