Wouldn't it be smarter if Democrats cut government programs instead of creating new ones?

Question

House Ways and Means Chairman Charlie Rangel (D., N.Y.) is a powerful man. When he makes the rules, Congress usually sticks to them.

Those rules now include “Pay-Go,” short for “pay-as-you-go.” This is something Democrats promised last year in their successful campaign to retake the Congress. The idea is that every increase in entitlement spending and every cut in taxes must be offset by a spending cut or a tax increase. Congress already spends lots of money it doesn’t have, but the concept here is that they can’t spend additional money they don’t have unless they can find additional revenue or savings somewhere else.

We’re seeing now what that means for fixing the Alternative Minimum Tax. In order to prevent this “tax on the wealthiest” from ensnaring 23 million American families, Pay-Go would force Democrats to raise other taxes to make up for the “lost” revenue.

But what if Rangel were to propose a tax increase that will actually reduce federal revenue? Would that tax increase still count as an offset against the future social spending programs that Democrats envision?

The answer is yes, and it isn’t a theoretical question. As part of his so-called “Mother of All Tax Increases” (H.R. 3970), Rangel would hike the capital gains tax rate by 63 percent. This will severely depress financial markets and almost certainly lose money for the government at the same time. And because Congress’s Joint Tax Committee and the Congressional Budget Office do not consider how taxes affect human behavior, it will count this tax increase as a positive instead of a negative.

The capital gains tax applies to earnings from the sale of investments that appreciate in price. When you buy a stock at $1, for example, and sell it a year later for $10, you pay this tax on your $9 gain. Rangel wants to boost that tax immediately from 15 percent to 19.6 percent, and then let it rise by five more points in 2011, when President Bush’s tax cuts expire.

The capital gains tax has a very direct effect on investors’ decisions because it hits so near to their activity in the market. It represents an extra transaction cost for each profitable sale of an investment. If it is very high, the tax tends to discourage investors from swapping out of mediocre investments into better ones unless they are guaranteed a very high return in advance. It distorts the markets by making tax-exempt bonds appear to be a more attractive investment than they would be otherwise.

This is not just theory — it has been demonstrated conclusively each time the capital gains tax has been raised or lowered. The capital gains tax offers uncontroversial proof that incentives really do matter in tax policy — a staple of supply-side thinking. For thirty years, each time the capital gains tax has been cut, its revenues have increased as investors have taken the opportunity to buy and sell more freely. When it has been raised, revenues have declined.


By 2011, Democrats plan to raise the capital gains rate from 15 percent to 24.6 percent. That would represent a 63-percent increase on the tax cost of every investment transaction — definitely large enough to begin affecting the decisions of the large financial institutions that control most of the stocks bought and sold each day. This could crush shareholder value for everyone — including the little guy. In some cases, it will encourage investors to stick with mediocre investments when their money could be getting more return and contributing more to the economy elsewhere.

Historically, capital-gains-tax hikes have meant less in tax collections, and less revenue for the government. Yet because they use what is called “static analysis,” Rangel’s congressional accountants will certify — contrary to fact — that a 63-percent increase in the capital-gains rate will translate to a corresponding increase in capital gains revenues.

The tax hike will also hurt a lot of people. It would be easy to dismiss a capital-gains-tax hike as something that only affects the wealthy, but this is false in a day when 92 million Americans’ financial fortunes and retirement plans are tied to the stock market, and millions more own investment properties.

Rangel’s tax hike, along with a much-feared pick-up of inflation, could constitute a one-two punch to your financial gut. The U.S. Department of the Treasury does not collect the capital-gains tax based on an investment’s inflation-adjusted or “real” value — you have to pay taxes on the inflation, too. Let’s say your $10,000 investment from 2000 only kept pace with inflation and was worth $11,708 in 2006. If you sold it at that price, you still paid taxes on that false “gain.” Under current law, the tax bill would have been $265. Rangel’s tax hike, once both stages are complete, would make you pay $420 just to recover your own money.

This is what “Pay-Go” means for you. Whether you have an IRA, a 401(k) or a little account on TD Ameritrade, you are going to lose a lot of money so that Democrats can balance congressional revenue and spending at the bottom of a blank page full of false information.

Answer 1

Liberals will never cut a government program.

They believe all the money you have is theirs, free to spend as they wish.

Any money you have left over is their gift to you.

Answer 2

I just wanted to respond to Westhill and just give him a little education about economics 101 everywhere around the world that they have done tax cuts it eventually ends up with more revenues coming in to the government from Ireland , Estonia Kennedy tax cut Reagan tax cut, a tax increase will always increase revenue the first year but as people start to hide their money and you stifle economic activity it starts to decline.

I remember a statement by a economist once he said no nation has ever been able to tax their way to prosperity even though some countries still don't believe it.

Answer 3

When are the Republicans going to learn their party has betrayed all it once stood for. Talk about taxes, spending and small government all you want, but the proof is in seven years of Republican rule that has led to the brink of financial ruin. Taxes went down, government increased and spending went through the roof. So much for "fiscal responsibility", or will they just redefine that, too, to make it fit their warped reality?

Answer 4

It would be smarter, and less dishonest, if Republicans would stop trying to turn things upside down, and admit that tax increases increase revenue, and that pay as you go is a laudable and conservative way to manage the budget.

Answer 5

The question is a bit wordy. About half-way through it, my eyes started to hurt and they just slammed shut. And now, for the life of me, I can't remember the question! Sorry I couldn't help clear up whatever is bothering you!

Answer 6

It's better to hold a stock. Democrats in general care for the underprilegded person.

Answer 7

Damnit, when are Democrats going to learn that the only sound financial policy is to borrow all the trillions you need from China?

Answer 8

I've never heard anyone call any politician smart. So I don't expect them to do anything that makes sense.

Answer 9

way too long to read...

but yes to your question. however, it was under bush that more government programs were created & more "pork" spent then ever before - to compare him with the "EVIL" bill clinton, bush in two years expanded the government much farther then clinton did in his eight. see: http://www.cato.org/pub_display.php?pub_id=3557

so, in reality, it doesn't matter much about what party, it's about who holds power & how they like to use that power.

Answer 10

Charlie Rangle is Hillary Clinton's tax pit bull.

He will raise taxes on the rich and that will raise it on us all because he thinks anyone who owns a clock radio to be rich.

The spending will NEVER be cut by democrats. They just don't know how it's done, never have done it and doing it goes against every nerve ending in their political bodies.