Don't Be Like Mike: What Kinsley & Co. fail to grasp - capital gains tax

National Review, July 17, 2000 by Stephen Moore

Over the past two decades, much has changed in the world of economic thought. But one phenomenon remains safely predictable: Ask a lefty about capital-gains taxes, and you are virtually certain to get a wrong answer.

Michael Kinsley is one of the worst offenders. Formerly editor of The New Republic and now editor of Slate, Kinsley has been writing tirades against capital-gains tax cuts for as long as anyone cares to remember. His columns are characterized by 1) great fervor and 2) imperviousness to evidence. He charges, for example, that this "tax break" enriches only America's yacht owners; that a rate cut would cost the Treasury $75 billion; that the supply-side economic-efficiency argument for capital-gains reduction is blather. Here's one of my favorite Kinsleyisms: The week after the Republicans took control of Congress in 1994, he wrote in the New York Times about the GOP's Contract with America, "with its impossible combination of tax cuts and spending increases and balanced-budget promises," and concluded:"It can't be done, of course."

Oops.

Kinsley is not alone in his relentless wrongheadedness: Hostility to cutting capital-gains taxes is part of the creed of orthodox liberalism. A few years ago, Jonathan Chait, Kinsley's understudy at The New Republic, attacked yours truly in an article entitled-what else?-"Less is Moore." It was a gallant attempt to overthrow the irrefutable logic of supply-side tax cuts, particularly the famous Laffer Curve insight that tax-rate cuts can produce more revenue for the government.

When Republicans passed the Archer-Roth capital-gains-rate cut in 1997, they set up a nifty real-life experiment. In a letter to The New Republic, I challenged Chait and his fellow editors to a $2,000 wager on the issue. My position was this: Over the next five years, with the new 20 percent capital-gains rate, the federal government would collect more, not less, in inflation-adjusted revenue from the capital-gains tax than it had in the previous five years (when the rate had been 28 percent). Chait declined, mentioning something about people transferring income out of wages and into capital gains, leaving overall revenues unchanged or lower.

For all their apparent self-confidence, liberals don't like putting their money where their mouth is. And it's a good thing too, or they would be a lot poorer. The Archer-Roth tax cut took effect in May 1997, so we've now had three years of experience with the lower rate. What have we learned? That those who criticized supply-side economics were dead wrong.

The latest tax-collection data from the Treasury Department indicate that capital-gains revenues have exploded. In 1996, the last year with the 28 percent rate, the government collected $62 billion in capital- gains receipts. But look what has happened:

The 1999 estimate is based on IRS data collected by economist (and NRcontributing editor) Lawrence Kudlow. In three years, the tax receipts are up an astonishing 74 percent, even though the tax rate is down by almost 30 percent. This is the Laffer Curve in spades.

But Michael Kinsley has derided tax cuts as "the politics of the free lunch." In 1989, he wrote that if a proposed capital-gains tax cut went into effect, the tax bill for people making over $200,000 a year would be decreased by an average of $25,000. The new statistics prove that this is impossible. If Kinsley is right that the rich pay most of the capital-gains taxes, and if capital-gains tax revenues have surged with the lower rate, then the rich must be paying more in taxes now. A class warrior like Kinsley should be in a state of euphoria.

Kinsley was also wrong in accepting the prediction of the congressional Joint Tax Committee that we would lose $75 billion in revenues if we cut the tax. This committee still uses "static" revenue models designed back in the Stone Age of economics, when forecasters believed that tax- rate changes didn't much affect people's behavior. That's why its crystal ball predicted a $75 billion revenue loss-when, in fact, based on current trends, we will have about a $100 billion gain for the government.

These are gargantuan errors. If you were to take a plane trip from Chicago to Detroit, and somehow ended up on a different continent, you'd be dealing in roughly the same magnitude of miscalculation. What's really infuriating is that the congressional economists are still using this same model for their economic predictions. Ask them, even now, what would happen if we cut the rate to 15 percent, and they reflexively respond that the government would lose revenue.

In the face of undeniable economic facts, some opponents of tax cuts get a little desperate. Edward Cohn admitted in the liberal American Prospect that capital-gains revenues are way up-how could he not?-but suggested that supply-siders are "making wild-eyed predictions . . . and then fudging or misinterpreting the numbers." How? The revenues, he says, have been generated by the rising stock market, not by Congress's tax policy. The Washington Post recently made exactly the same claim. But this argument neglects the interconnectedness of the economy. If you cut the capital-gains tax, you increase the after-tax value of capital, and thus the after-tax rate of return on stocks. Cutting the capital-gains tax makes technology, computers, factories, and business in general instantaneously more valuable.