Debate blogging

Okay, watching the debate. Came in late. Charles Gibson began advocating for the Laffer Curve, though not by name. He stated as fact that we'd get more tax revenue from Capital Gains Taxes if we reduce the tax rates on them.

Currently, people who get their income from investments (or investing other people's money) pay 15% on that income. So a billionaire hedge fund manager pays a lower tax rate than his secretary.

The concept behind the Laffer Curve is pretty simple. If taxes are 0% the government won't collect any revenue. If it's 100% it's not worth doing anything taxed, so the government gets almost no revenue. The best tax rate to get the most revenue is between 0% and 100%. I agree with that much. The question is where the optimum tax rate is. Conservatives always claims it's lower than the current tax rate.

The thing is, the economy always grows over the long term. Of course you'll eventually get govt revenue higher than before the tax cut if you wait a decade. Conservative economists have quit trying to show that a US tax cut produced more revenue than we would've gotten without the cut (though spin doctors and credulous journalists like Charlie Gibson haven't stopped stating it as fact). The failure of the Laffer Curve is why Bush I had to raise taxes to erase the Reagan budget deficits. Bush I's balanced budget eventually led to the Clinton economic boom.

I'm mildly annoyed with Gibson. But I'm disgusted that both Democrats let a shaky GOP talking point get treated as a fact.

[TPM blogged nicely during the whole debate, in a more readable style than I did. There's a reason why I draw instead of write!]

Update (April 19): Here's an explanation from the Congressional Budget Office. In short, when investors learn there's going to be a capital gains tax cut, they hold off selling investments until after the cut, then sell! Sell! Sell! This creates a short term surge in capital gains revenue, but no long term change. In the long run, therefore, the government loses revenue:

The sensitivity of realizations to gains tax rates raises the possibility that a cut in the rate could so increase realizations that revenue from capital gains taxes might rise as a consequence. Rising gains receipts in response to a rate cut are most likely to occur in the short run. Postponing or advancing realizations by a year is relatively easy compared with doing so over much longer periods. In addition, a stock of accumulated gains may be realized shortly after the rate is cut, but once that accumulation is "unlocked," the stock of accrued gains is smaller and realizations cannot continue at as fast a rate as they did initially. Thus, even though the responsiveness of realizations to a tax cut may not be enough to produce additional receipts over a long period, it may do so over a few years. The potentially large difference between the long- and short-term sensitivity of realizations to tax rates can mislead observers into assuming a greater permanent responsiveness than actually exists.