Tax Justice Digest stories about 2008 Presidential Race

ABC news anchor Charlie Gibson perpetuated a myth about taxes at the Democratic presidential debate on Wednesday night. Gibson said of the capital gains tax that “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 percent, the revenues went down.” He asked Senator Obama, who has signaled that he would raise the capital gains tax from its current level of 15 percent to 28 percent, why he would bother doing this if it would actually reduce revenues.

There is just one problem. What Charlie Gibson said is not true. Revenues from capital gains do not rise when the tax is cut. They rise when the economy is booming and they collapse when the economy tanks. In fact, revenue from capital gains taxes is currently well below the peak it reached during the Clinton era — when taxes were higher.

A small group of ideologues associated with “supply-side economics” believes that tax cuts can actually increase revenues. While this notion is rejected by most mainstream economists and sounds ludicrous to the average person, members of the media and Congress seem unusually susceptible to being hoodwinked into believing it. Their general idea is that if we lower capital gains taxes, there will be more capital gains realizations (meaning more people sell their property that has gone up in value) because the tax on that profit has been cut, and this will lead to revenue increasing overall.

Even if there are more realizations as a result of a capital gains tax cut, the resulting revenue will be nowhere near enough to make the tax cut budget-neutral, much less revenue-enhancing.

The nearby chart shows that the ups and downs in revenue collected by the capital gains tax seem to have more to do with what’s happening in the broader economy than with tax policy. In the early and mid-1990s, when the top capital gains tax rate was 28 percent, the revenues collected by the tax shot through the roof. They continued to climb after the rate was lowered to 20 percent in 1997, but this looks more like the continuation of a preexisting trend linked to economic prosperity rather than a response to the change in the rate. Then in 2001 and 2002 the revenues collected by this tax fell precipitously. This was not following any change in tax policy at all, but clearly linked to the bursting of the dot.com bubble and its ramifications on the stock market.

Now that the Arizona senator is the presumptive Republican nominee, it's worth asking what sorts of tax policies he would push for as President. Our honest answer: We have no idea. He has held several views and his recent explanations don't quite explain his various policy permutations. As our Congressional report card covering the years 2001 through 2006 shows, CTJ has given McCain an "A" in some years and an "F" in other years. But one might think that the "real" John McCain could be found by digging deeper, farther back into his history.

So it's worth looking at McCain's record before he ran for president in 2000. As explained in a report issued by CTJ on the senator's record back then, McCain often voted against bills that would reduce the deficit by closing tax loopholes (apparently "pork" is OK in his eyes if it's done through the tax code) or raising tax rates. He did vote in favor of the sweeping revenue-neutral tax reform bill in 1986 (along with an almost unanimous senate), but after the Republicans took over Congress in the 1990s, he sided with his party on bills to provide unaffordable and unnecessary tax cuts.

During his campaign for president in 2000 and for quite a while thereafter, something strange happened to John McCain. He strongly opposed the most central planks in the GOP platform and the driving force behind the conservative movement: tax cuts. Specifically, McCain was one of only two Republican senators to vote against both the 2001 and 2003 tax cuts. It is hard to exaggerate how amazing these votes are, since tax cuts have been the main policy proposal offered by Republican presidential candidates in almost every election since 1980. (Taxes weren't McCain's only deviation from conservative ideology; Jonathan Chait's recent article provides a long list of the ways McCain became a functional Democrat.)

Then, as he contemplated another run for the presidency, McCain had another change of heart. The key provision of the 2003 tax cut bill that he had opposed was the tax cut for capital gains and dividends. But In 2005 he voted for the budget reconciliation bill that extended that very gift to the wealthy for an additional two years.

McCain had earlier complained that "repeal of the estate tax would provide massive benefits solely to the wealthiest and highest-income taxpayers in the country," but in 2006 he decided that repealing most of the estate tax was just fine by him. He voted that year for the bill to gut the estate tax, which won a majority of votes in the Senate but failed to obtain the 60 votes needed for passage.

Now McCain has fully channeled his party’s orthodoxy against taxes on the wealthy. He says he wants to make the Bush tax cuts permanent. He wants to slash the corporate tax rate from 35 percent to 25 percent (even though the tax "burden" on corporations in the United States is already among the lowest in industrialized countries).

Now, it would be one thing if John McCain actually offered some "straight talk" to explain all this. If he simply said he was wrong, or he was temporarily blinded by his rage at the GOP, that would be at least understandable. But instead, he has offered an explanation so convoluted that it defies belief.

John McCain now says that he opposed the Bush tax cuts in 2001 and 2003 because he thought they needed to be accompanied by cuts in spending to keep the budget deficit under control. Actually, what he said in 2000 about then-Governor George W. Bush's tax plan was, "I don’t think the governor’s tax cut is too big—it’s just misplaced. Sixty percent of the benefits from his tax cuts go to the wealthiest 10% of Americans—and that’s not the kind of tax relief that Americans need."

But for the sake of argument let's just take his word that he was concerned about budget deficits. How does he explain his position now, since the deficit is worse than ever? Here's a typical answer given by McCain: He explained at a debate on September 5 that he voted against the 2001 and 2003 tax cuts because they did not include cuts in spending, which he thought were also necessary. But at the same time, he also makes the claim that "it's very clear that the increase in revenue we've experienced is directly related to the tax cuts that were enacted, and they need to be permanent."

This is both baffling and astounding. It's baffling because if tax cuts actually could cause revenues to increase, then we would never need to cut spending ever. In fact, we could cut taxes and the resulting new revenue could be used for increased spending!

But it's also astounding because even Bush's Treasury Department has admitted (in a report released in 2006) that tax cuts cannot possibly pay for themselves. Sure, lower taxes might create some incentive to work and invest, resulting in some more income and thus more tax revenue, but that will never make up for more than a small fraction of the cost of a tax cut.

Does McCain believe, contrary to almost every mainstream economist, the ludicrous proposition that we can raise revenue by cutting taxes? Or has he been altering his view to win over an extreme fringe within his party to win its nomination?

So we have a riddle, and like any ancient sphinx, John McCain is not giving any clear answers. It almost makes us sad that we won't hear more about how Mike Huckabee wants to implement a proposal from the Church of Scientology to abolish the IRS. At least we know where he stands.