OBAMA'S REVENUE SOUP

Wall Street Journal editorial, Obama's Revenue Soup: A History Lesson on Capital Gains Taxes:

In "Annie Hall," Woody Allen tells the joke of two women complaining about a restaurant. The first says the food here is awful and the second replies, yes, and they serve such small portions. Sounds like President Obama's proposal to raise the capital-gains tax: It will hurt the economy and it won't raise much new revenue.

Mr. Obama's plan would raise the capital-gains rate on January 1 to 20% on those who earn more than $200,000 ($250,000 for couples), plus a 3.8% investment surtax to finance ObamaCare. That 23.8% rate amounts to a nearly 60% increase from the 15% rate in effect since 2003. And that's without his new "Buffett rule," which would take the rate to 30% for many taxpayers.

This and other rate hikes aimed at higher-income earners are supposed to raise about $700 billion in tax revenues over the next decade. Fat chance. Ever since the famous 1978 bipartisan capital-gains tax cut sponsored by the late William Steiger of Wisconsin, the same pattern has repeated itself: raising the capital-gains rate reduces revenues, and lowering it leads to revenue increases.

The nearby chart shows the 35-year trend in capital-gains revenue and tax rates—through 2008, the last year data are available.

The data clearly show that the overall economy is the single biggest factor in capital-gains realizations and revenue. But the data also show that time and again revenue has multiplied despite a lower rate, and arguably because of it. ... Congress shouldn't be fooled by government forecasters who predict a revenue boom from a higher capital-gains rate. They have blown this call every time. ...

In our view the optimal capital-gains tax rate is one that leads to the most capital investment, jobs and wealth gains for American workers. That economically optimal rate is somewhere close to zero and would lead to more overall tax revenue as the economy grew faster. But if Congress wants a capital-gains tax, history suggests the revenue maximizing rate is closer to 15% than to 23.8%.

As John F. Kennedy put it in 1963 when he endorsed a cut in this tax: "The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital" as well as "the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy."

Today's Democrats in Washington are no Jack Kennedys. As President Obama told Charlie Gibson of ABC News in 2008, whether or not a higher capital-gains tax raises more revenue is irrelevant to him. He wants a higher rate as a matter of "fairness." The soup may be lousy but he wants more of it.