The Congressional Budget Office, major media outlets, and the commentariat were surprised and delighted when it was reported the federal tax revenues had increased to a record level. Not so fast, says Red Jahnke:
Much of the increase in 2013 receipts is due to final tax payments for 2012 deriving from a rush to realize long-term capital gains before the 15% “Bush” tax rate on such gains expired at the end of 2012—and before the new 23.8% rate on long-term capital gains for higher-income taxpayers took effect on Jan. 1. How do we know this? Because virtually the same tax change occurred during the Reagan years, when the long-term capital gains tax rate jumped eight points, to 28% in 1987, when the Tax Reform Act took effect, from 20% in 1986.
Here are the 1980s data expressed in current dollars: In 1985, before any talk of the Tax Reform Act, individual taxpayers reported about $310 billion in long-term capital gains. In 1986, with the Tax Reform Act signed into law but not yet in effect, reported long-term capital gains ballooned to $580 billion. The following year, with the act’s 28% rate in place, reported gains plunged to $250 billion. Tax revenues naturally followed—long-term capital gains tax revenue doubled to $90 billion in 1986, or 14.7% of total individual incomes taxes, before falling off again in 1987.
After these gyrations, long-term capital gains did not hit the 1986 peak again for a decade. This tax revenue pattern was replicated in many states whose tax systems peg off the federal system.
I would like to see that breakdown quantified. Meanwhile, is anyone willing to bet that if federal tax revenues decline next year the Administration and its allies will blame it on everything but the change in tax policy?
If, on the other hand, revenues continue to increase, it would certainly call Mr. Jahnke’s assertions into question, wouldn’t it?