Steve Chapman

It's true that rates and revenues may sometimes move in opposite directions. When the rate rose in 1987, capital gains realizations dropped. But there's an obvious explanation for that transitory effect. In 1986, seeing the increase coming, people hurried to cash in capital gains while the rate was low.

It's also true that after the rate fell in 1997, realizations rose. But as University of Michigan economist Joel Slemrod notes, that increase began well before the cut -- and they plunged after 2000, without any rate increase. Assessing the last two decades, the Congressional Budget Office reports that any positive effect on realizations is "certainly not large enough to offset the losses from a lower rate."

Sensible people might not mind the lost revenue if the change strengthened the economy. But chances are it does just the opposite, by encouraging taxpayers to jump through hoops to reduce their tax liability.

A low capital gains rate hinders the free market by inducing people (especially very wealthy ones) to find ways to take earnings as capital gains instead of ordinary income. In other words, it encourages them to do things that would not make economic sense otherwise. A modestly higher rate would discourage such wasteful avoidance.

Like all taxes, capital gains taxes are a burden. But given that the federal government spends nearly $3 trillion a year, taxes are a regrettable necessity. When we cut capital gains taxes, we have to raise other taxes to make up the loss. Or we have to borrow more money -- which means raising taxes in the future.

Republicans may abhor the obligation of paying for the welfare state they helped preserve. But for the moment, the only real choice is between doing that job better and doing it worse.

Steve Chapman

Steve Chapman is a columnist and editorial writer for the Chicago Tribune.

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