The Argument For Zero Capital Gains Taxes

If you care about maximizing government revenue that is:

Most of the discussion by economists of the appropriate capital gains tax rate is about a very narrow criterion: the effect of capital gains tax rates on capital gains tax revenues. But in a 2009 study done for the Institute for Research on the Economics of Taxation (IRET), Ohio State University economist Paul D. Evans considers a broader criterion: the effect of capital gains tax rates on overall federal tax revenues.

What’s the difference? Because capital gains taxes discourage capital formation, they also cause other tax revenues to be lower. If there’s less capital formation, workers have less capital to work with and, therefore, are less productive. If they’re less productive, the government collects less tax revenue from them.

Professor Evans looks at data from the overall economy from 1976 to 2004, a period in which there was a lot of variation in the marginal tax rate on capital gains. He concludes that in 2004, the tax rate on capital gains that would have maximized overall federal government revenues was 9.69 percent. But if the government taxes to maximize revenues, the deadweight loss from the last epsilon of tax increase is infinity. Therefore, if the revenue-maximizing capital gains tax rate was 9.69 percent, the optimal tax rate was even lower. So a greedy, grasping government that wants to maximize tax revenues should cut the marginal tax rate on capital gains and if that government cares at all about taxpayers, it should cut the rate even further.

14 Responses to “The Argument For Zero Capital Gains Taxes”


  • You’re not seriously arguing for a zero capital gains tax are you, HP? Seriously?

    You believe Romney should pay zero taxes on his 21 million dollars of income? Seriously?

    I mean, it’s one thing to see today’s Republican candidates spout this kind of bizarre nonsense, but I really wouldn’t expect it from you.

  • I like the data based conclusions, so this is great.

    Couple of points to ponder. Apparently the Searle Foundation is apparently the work of this guy who was essentially an AEI acolyte. Data is data and I haven’t looked at your full report (it’s like 24 pages), but I think it’s worth considering these sources. You of course expect them to reach conclusions that are in the interest of the super rich. This is obviously exactly what Mitt Romney types want to hear, though not so exciting if you are a janitor.

    Also notice that stopping at 2004 is unfortunate. Revenues fell off pretty starkly under Bush, but of course it happened later in his second term. Bush’s lower capital gains rates kicked in post 2004. Revenues have totally collapsed. This window of time looks a bit contrived. This was written in 2009. Is there a reason he didn’t include more recent data?

  • LaurenceB,

    IF maximizing government revenue was my goal, then yes, I would be arguing for – or atleast consider – a much lower capital gains tax. With that said, maximizing government revenue is not my goal.

    Regarding your second question, namely: You believe Romney should pay zero taxes on his 21 million dollars of income? Seriously?

    This is actually not true. Even if capital gains taxes went to zero, Romney’s taxes would be much higher than zero. See here.

    Jon,

    If the conclusions of the study are true, they are not only helpful for the rich but the janitor as well. Here is the part you seemed to have missed: Because capital gains taxes discourage capital formation, they also cause other tax revenues to be lower. If there’s less capital formation, workers have less capital to work with and, therefore, are less productive. If they’re less productive, the government collects less tax revenue from them.

    This *also* benefits the janitor. Again, this is contingent on whether or not the study is accurate. So while it’s very easy to see the world as class warfare, real life is usually more complicated.

  • Jon,

    I emailed David Henderson, the author of the quote above, about the dates. He suggested that it’s probably because “he wanted to cover the period before the 2003 Bush tax cut on capital gains and dividends took place”, though he doesn’t know for sure.

    Sounds plausible. But your point about the dates remains a good one.

  • Lansburg is not right about what Romney paid in taxes. The money he invested he did not acquire by working a job, getting paid a salary, and then investing money from that job. He took other people’s money, then paid himself in a form that allowed him to pay a capital gains rate. There was no 35% for Romney.

    http://www.fair.org/blog/2012/01/19/oreillys-comes-to-romneys-aid-on-taxes-armed-with-inaccuracies/

    I agree with you that the janitor should be happy with zero capital gains tax rate if the conclusions of the report are correct. I think intuitively though the janitor is dubious. Cutting tax rates for the rich once again? This is the solution to our problems? He’ll be dubious and so am I.

    If you are looking at the effect of low capital gains tax rates on government revenue, why wouldn’t you want to look at the period for which the rate fell? That seems like a good test. And I imagine it would turn the results of the report on their head. No President going all the way back to Eisenhower had such a poor performance in terms of increasing government revenue then Bush.

  • This is actually not true. Even if capital gains taxes went to zero, Romney’s taxes would be much higher than zero.

    I don’t follow you. Even Romney has said his taxes would be zero if there were no capital gains tax. Are we both wrong?

    (If you’re trying to argue that Romney has already paid that 35% income tax rate, please remember that that was presumably many years ago. Romney is unemployed now. Unless he’s wrong about that too.)

  • LaurenceB,

    You write: If you’re trying to argue that Romney has already paid that 35% income tax rate, please remember that that was presumably many years ago.

    This is exactly my point. The capital gains taxes is in addition to that. It adds to his tax base. So while he may only pay 15% today, he is paying 15% on investments he made with money he paid ~35% on, already – albeit, years ago.

    That makes his true tax rate higher.

  • Indeed, if I had said that Romney’s “true tax rate” (however you define that!) would be zero, then I would have been wrong. But I didn’t say that, did I? I simply stated that his tax penalty right now would be zero. Romney agrees. It seems indisputable.

    And by the way, this concept of a “true tax rate” – even if it applied to what I said (which it doesn’t) – is not at all the super-duper convincing argument you may think it is.

  • So while he may only pay 15% today, he is paying 15% on investments he made with money he paid ~35% on, already – albeit, years ago.

    Romney never paid 35%. Are you not seeing that? Romney is a special case because the money he invested was not his own. If there were zero capital gains Romney would never pay anything at all. Do you not understand this?

  • LaurenceB,

    Agreed.

    Jon,

    Obviously I disagree with you. But little time or patience to get into it. I’ll let you have the last word.

  • You think Romney earned income as wages, paid 35%, then invested what he didn’t spend? I don’t know how this can be argued. It’s a matter of looking at the source of Romney’s investment income, which has been done. I don’t think you understand what I’m saying.

  • I rarely understand what you are saying. :-)

  • It may help to consider the counterfactual. Suppose that there was no corporate taxation. In this case you can follow the money and it will turn out that shareholders in general would have more and the government will have more, likely with a deadweight loss thrown in. In this case, it is reasonable to label the shareholders who have less money than they otherwise would have had as taxpayers. Economists talk about this as tax incidence. It’s difficult to say what incidence is for a given person with the complexity of the tax code, but in this case it is clear that the tax has already fallen on Romney.

  • That should read “In this case you can follow the money and it will turn out that shareholders in general would have less and the government will have more, likely with a deadweight loss thrown in.”

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