Capital Gains and Capitol Pressures

Politics provides strong incentives to stretch or deny the truth. Michael Boskin is a distinguished economist who resisted those ubiquitous pressures for many years. That is, although conservative, Professor Boskin represented the consensus views of economists to powerful people in Washington, resisting political pressures for wishful thinking.

It is, thus, both understandable and regrettable to read his editorial in today's Wall St. Journal., where he claims that raising taxes on capital gains will reduce the capital available to American businesses. If the government reduces its tax revenue by a dollar, then the domestic capital available to American businesses declines by a dollar. If that tax cut spurs less than a dollar of private savings, national savings declines.

The United States (even after last month's debacle) has trillions of dollars of unrealized capital gains. These gains are the result of savings and portfolio allocation decisions Americans made in past years. Thus, the main effect of a capital gains tax cut is to reward people for earlier decisions. If McCain cuts capital gains taxes in 2009, national savings will decline during his first term.

Economists disagree on many things, but both liberals and conservatives agree on basic principles of causality: unanticipated 2009 tax laws did not affect savings from 1960-2007. As I said, it is understandable that Professor Boskin gave in to pressures to conform with conservative dogma. At the same time, I wish he had continued defending future generations from unsustainable deficits and continued defending common sense.