Now My Neighbor, It’s Time to Dance

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?

16 comments… add one
  • Red Barchetta Link

    “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?”


    Now I’m going to go and listen to some Miles Davis.

  • Ben Wolf Link

    You can be sure the deficit will not fall to target forecasts next year or the year after.

  • The Age of Competence Link

    And I’ll note that the deficit is also coming down because taxes were raised on the working poor and the middle class (funny how I’m always a rich person when Dems want to up taxes, no matter my standing in life) and that Obama had the bright idea of a sequester, which will soon start cutting into people’s unemployment benefits.

  • steve Link

    1) Best chart I have in my archives (and easily found) on cap gains rates and revenues. The WSJ ,surprisingly, cherry picks some data. Note that revenues, as percent of GDP, stay about the same when rates varied from 25%-40%.

    2) I believe the official conservative/libertarian view is that unemployment insurance increases unemployment and should be eliminated or tightly restricted. Since they oppose countercyclical spending, they pretty much have to oppose increases in UE.


  • The Age of Competence Link

    That’s great steve, but the point is that the Dems want to take credit for both extending UEC (when Bush actually started the process) and for cutting UEC. Can’t have it both ways, though of course you commies always try.

  • michael reynolds Link


    That prediction doesn’t look too good.

    WASHINGTON — Since the recession ended four years ago, the federal budget deficit has topped $1 trillion every year. But now the government’s annual deficit is shrinking far faster than anyone in Washington expected, and perhaps even faster than many economists think is advisable for the health of the economy.

    That is the thrust of a new report released Tuesday by the nonpartisan Congressional Budget Office, estimating that the deficit for this fiscal year, which ends on Sept. 30, will fall to about $642 billion, or 4 percent of the nation’s annual economic output, about $200 billion lower than the agency estimated just three months ago.

    The agency forecast that the deficit, which topped 10 percent of gross domestic product in 2009, could shrink to as little as 2.1 percent of gross domestic product by 2015 — a level that most analysts say would be easily sustainable over the long run — before beginning to climb gradually through the rest of the decade.

    No doubt Ice and Verdon will be along shortly to explain how this isn’t really happening because of something, something, something.

  • Ben Wolf Link

    Michael, the combination of deficits and credit expansion, primarily through student loans, have sustained the economy these past four years. Now we have a budget deficit falling toward parity with our trade deficit, which means private sector inflows = ouflows; no more private surplus.

    The only possibility for hitting deficit targets is for credit to expand strongly enough to overcome the fiscal drag government policies are imposing on the economy. Student loans are not enough to do the job, which leaves the ongoing return of sub-prime as the only avenue. In this scenario the results will be analagous to the years before 2008, credit driven growth serving to delay the inevitable debt-deflation that must follow.

    I would dearly like to think we have learned from the mistakes of the past, but we seem eager to grab for another Clinton budget surplus so I’m not holding my breath. What I am saying is that either a mini-credit boom will push the deficit even further down than forecasts, or households will quickly exhaust their capacity to take on debt and spending will fall, pushing automatic stabilizers in the opposite direction and increasing the deficit.

    Either way you will most certainly NOT get the numbers the CBO is throwing out. It has consistently underestimated the effects of credit dynamics and the power of fiscal multipliers.

  • Ben Wolf Link

    If you want me to make a call my guess is the economy is decelerating, and the deficit will remain above CBO projections. How much households can and do borrow is the wild-card, and one much more difficult to predict.

  • The Age of Competence Link

    The agency in question has made mid-year claims that the deficit will be smaller than forecast during every year of Obama’s reign. No doubt they will be correct this time, that the deficit will be smaller than forecast, because now the working poor and middle class have had their taxes raised, and benefits are now being cut.

    But I really doubt it will get in under 700,000,000,000. That seems far-fetched.

    And Reynolds, why is a 600,000,000,000 plus deficit a good thing NOW, when a 100,000,000,000 deficit was a bad thing a few years back? I just want to understand why it was a mortal crime against our children back when Bush had deficits that were much smaller that Obama’s, but now it’s the best thing ever when the deficits are some much bigger.

  • michael reynolds Link

    Simple question: Did any member of the GE-GADS (Glittering Eye Gloom and Doom Society) predict that in May of 2013 the CBO would be reporting dramatically lower deficits?

    How about any of the Econ blogs you all like?

    If not, then why should I take any of your predictions seriously?

    It’s a bit like the failure of the CIA to notice that the USSR was disintegrating. There are certain moments when the failure to anticipate becomes very revealing of an underlying fundamental lack of understanding.

    To put it bluntly, with the greatest possible respect for your intellects and in most cases integrity, I don’t think you numbers boys really know what the hell you’re talking about. I think you’re astrologers. Because otherwise I’d have been reading how deficits would drop and I’m pretty sure I didn’t see that.

  • michael reynolds Link


    Never said it was a good thing. Just said you didn’t see it coming. Which dramatically reduces your credibility as a prophet.

  • Ben Wolf Link

    @Michael. I did, unless you don’t consider me a member of GE-GADS.

    I’m sure you’ve heard me complaining the cyclical deficit was falling too fast and that we don’t need budget cuts for that purpose.

  • The Age of Competence Link

    If not, then why should I take any of your predictions seriously?

    Given all the financial misses of the Obama Administration on deficits among other things (including UE) why should I take them seriously? I mean, you will, because you will always toe the party line, but why should anyone else?

  • The Age of Competence Link

    The larger question is: Why should I be optimistic? It’s not like things are getting better for anyone I know, not one single person. And for lots of them it just keeps getting worse. I don’t see why I should be so fucking happy because Barack Obama throws expensive parties, uses the IRS to trash his enemies, and complains that the reason he can’t get anything done is because Rush Limbaugh is a big fat meanie. That ain’t gonna cut it.

  • Andy Link

    It’s a bit like the failure of the CIA to notice that the USSR was disintegrating.

    That’s actually a myth. The CIA pretty accurately predicted the decline of the USSR, as well as the economic, social and political conditions in the country from at least the 1970’s. As is often the case, these assessments were forgotten or ignored. Details here. If you have a subscription, this is an excellent article by noted intelligence historian Jeffrey Richelson.

  • Andy Link

    As far as the CBO goes, I don’t give their predictions much credence anymore. While I think they give it their best effort, the ability to predict budget matters in 10 years with any degree of accuracy remains beyond their capabilities.

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