i love a little econ on a monday morning
Wall Street Journal Online: Obama's Tax Evasion
It's a simple concept in consumer goods. If you raise prices too much, you make less money because you price customers out of the market. See: Playstation 3. The fact that they are now putting their lowered price on their commercials simply screams "PLEASE buy our product! We lowered the prices JUST FOR YOU!" So it seems there is a simple rule in the realm of consumer goods pricing:
HIGHER PRICES DO NOT ALWAYS GENERATE MORE REVENUE
When it's applied to taxation, however, it seems to get a bit more complicated. And justifiably so: out tax system is among the most complicated in the world. But in some areas, there is a not only a logical theoretical application of this rule, but a clear historical trend as well. Yet, certain politicians cannot seem to grasp this simple truth:
HIGHER TAXES DO NOT ALWAYS GENERATE MORE REVENUE
It's a rule that is especially relevant in very discretionary spending. I would guess, for example, that higher taxes on cigarettes tend to stay within the conventional wisdom that to make more money off the American public, you jack up the taxes, because smokers tend to care more about getting their fix than the price of the cigarettes. Investing, however, is a highly discretionary exercise. Capital gains taxes, therefore, may not fit that mold. And contrary to popular belief, it is not only the ultra-rich who have to worry about capital gains taxes. From the article:
In 2005, 47% of all tax returns reporting capital gains were from households with incomes below $50,000, and 79% came from households with incomes below $100,000.
Nearly half of the tax returns reporting capital gains income below $50k per year. Now, is the distribution of capital gains 50% under $50k households? Of course not. The wealthy are obviously are affected more because they invest more. But here's where the discretionary spending part comes in. When you increase the taxes on investments, people do other things with their money. And when you lower the taxes, people are encouraged to invest. We've seen this in the Clinton and Bush administrations.
"Bill Clinton in 1997 signed legislation that dropped the capital gains tax to 20%," said Mr. Gibson. "And George Bush has taken it down to 15%. And 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%, the revenues went down."
Apparently when asked about why he would raise capital gains when it tends to generate less revenue during last week's debate (which I was unable to watch), Obama pretty much avoided the issue. He simply reiterated that the government needs more money for things like healthcare. I don't know how moderators remain civil, because it it were me, I'd want to say something like, "I'm confused. I just said that revenue has shown to DECREASE when cap gains taxes are raised. And you responded by saying we need MORE tax revenue. So are you intentionally ignoring my point or were you simply not listening?"
The most poignant part of the article is its conclusion of Obama's response, because I really think it cuts to the heart of the issue.
Either the young Illinois Senator is ignorant of this revenue data, or he doesn't really care because he's a true income redistributionist who prefers high tax rates as a matter of ideological dogma regardless of the revenue consequences. Neither one is a recommendation for President.
I firmly believe it's the latter. Raising the capital gains tax is simply a populist maneuver. It's a way to tell voters, "See? I get it! I'm sticking it to the rich guy!" It has nothing to do with generating revenue for necessary programs or he'd lower taxes.
It's a simple concept in consumer goods. If you raise prices too much, you make less money because you price customers out of the market. See: Playstation 3. The fact that they are now putting their lowered price on their commercials simply screams "PLEASE buy our product! We lowered the prices JUST FOR YOU!" So it seems there is a simple rule in the realm of consumer goods pricing:
HIGHER PRICES DO NOT ALWAYS GENERATE MORE REVENUE
When it's applied to taxation, however, it seems to get a bit more complicated. And justifiably so: out tax system is among the most complicated in the world. But in some areas, there is a not only a logical theoretical application of this rule, but a clear historical trend as well. Yet, certain politicians cannot seem to grasp this simple truth:
HIGHER TAXES DO NOT ALWAYS GENERATE MORE REVENUE
It's a rule that is especially relevant in very discretionary spending. I would guess, for example, that higher taxes on cigarettes tend to stay within the conventional wisdom that to make more money off the American public, you jack up the taxes, because smokers tend to care more about getting their fix than the price of the cigarettes. Investing, however, is a highly discretionary exercise. Capital gains taxes, therefore, may not fit that mold. And contrary to popular belief, it is not only the ultra-rich who have to worry about capital gains taxes. From the article:
In 2005, 47% of all tax returns reporting capital gains were from households with incomes below $50,000, and 79% came from households with incomes below $100,000.
Nearly half of the tax returns reporting capital gains income below $50k per year. Now, is the distribution of capital gains 50% under $50k households? Of course not. The wealthy are obviously are affected more because they invest more. But here's where the discretionary spending part comes in. When you increase the taxes on investments, people do other things with their money. And when you lower the taxes, people are encouraged to invest. We've seen this in the Clinton and Bush administrations.
"Bill Clinton in 1997 signed legislation that dropped the capital gains tax to 20%," said Mr. Gibson. "And George Bush has taken it down to 15%. And 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%, the revenues went down."
Apparently when asked about why he would raise capital gains when it tends to generate less revenue during last week's debate (which I was unable to watch), Obama pretty much avoided the issue. He simply reiterated that the government needs more money for things like healthcare. I don't know how moderators remain civil, because it it were me, I'd want to say something like, "I'm confused. I just said that revenue has shown to DECREASE when cap gains taxes are raised. And you responded by saying we need MORE tax revenue. So are you intentionally ignoring my point or were you simply not listening?"
The most poignant part of the article is its conclusion of Obama's response, because I really think it cuts to the heart of the issue.
Either the young Illinois Senator is ignorant of this revenue data, or he doesn't really care because he's a true income redistributionist who prefers high tax rates as a matter of ideological dogma regardless of the revenue consequences. Neither one is a recommendation for President.
I firmly believe it's the latter. Raising the capital gains tax is simply a populist maneuver. It's a way to tell voters, "See? I get it! I'm sticking it to the rich guy!" It has nothing to do with generating revenue for necessary programs or he'd lower taxes.