I.O.U.S.A - Addison Wiggin [112]
But even if the cut in the tax rate did not increase capital gains tax receipts, you still might make it a no - brainer, a win/win for everyone. For example, with lower capital gains tax rates, you ’ re going to get more investment, more output, more employment, more production. You ’ ll have more sales taxes, more income taxes, more payroll taxes — all sorts of other taxes will increase.
Even if you don ’ t collect more revenues from the capital gains tax itself, you may, in fact, collect more revenues for the federal government in total.
But even if you collect fewer total revenues in the federal government from a cut in the capital gains tax rate, you still might make it a no - brainer. For example, a lot of government spending is predicated on needs tests, means tests, and income tests.
You have unemployment benefi ts, you have food stamps, and you have supplemental security income. But if you cut the capital gains tax rate and increase output employment and production, that should lead to a reduction in government spending. So even if the shortfall in revenues is there, you might have an induced reduction in spending that would more than offset the shortfall in revenues, and you would actually have a reduction in total debt. That would still be a no - brainer for cutting the capital gains tax rate.
Even if the federal government debt increases, there are state and local governments that will benefi t by the federal capital gains tax rate reduction. They ’ ll collect more taxes. They ’ ll spend less. If the total amount of debt, federal, state, and local, is reduced, I see no argument on God ’ s earth as to why you wouldn ’ t want to cut the capital gains tax rate.
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Arthur
Laffer 227
Even if that ’ s not true, even if all debt goes up, you still want to look at the time pattern of this debt. Let ’ s imagine, for a moment, that I build a factory based upon a presumed tax rate of 10 percent on corporate profi ts. The day I fi nish that factory, the tax rate goes up, from 10 percent to 90 percent. Do I tear the factory down? Of course not. I don ’ t tear it down, but when things wear out, I don ’ t replace them. It takes a long time to create a capital stock, and it takes a long time to destroy a capital stock. Supply and demand elasticities are very much greater after a long period of time than they are immediately. Even if the immediate impact of lowering the capital gains tax rate is to increase federal, state, and local debt over time, when those elasticities become greater and greater, that debt will fall, and, in fact, you might even get surpluses.
When you look at the overall picture, you want to consider the discounted present value of all future debt. That is the essence of the Laffer curve [the relationship between tax rates and tax revenue collected by governments]. The Laffer curve is not the end - all and be - all for cutting tax rates. You really want the government to benefi t society. If you create more output, employment, and production, you may still want to even have larger defi cits because it ’ s great for society.
You should not use the Laffer curve as your tax criteria. The last thing you ever want to do is maximize tax receipts in a society.
You want your tax rates way below that point. It ’ s not simple, or not easy. You ’ ve got to think it through very, very carefully. In certain areas, where you have the capital gains tax rate and higher taxes on personal income, there are very strong feedback effects.
On other taxes, you don ’ t have those same strong feedback effects.
The political issue today is what to do with the highest marginal tax rates, such as inheritance, capital gains, and dividends. I would argue that those are the exact areas in which you get the most feedback effects and in which you ’ re most likely to be into the