On ABC’s This Week today, Sen. John McCain (R-AZ) embraced ABC News anchor Charlie Gibson’s cocktail-napkin economics and claimed that “every time you cut capital gains taxes, revenues have increased”:
MCCAIN: Sen. Obama says that he doesn’t want to raise taxes over, on anybody over, making over $200,000 a year. Yet he wants to nearly double the capital gains tax, nearly double it, which a hundred million Americans have investments in. Mutual funds, 401ks, policemen, firemen, nurses, he wants to increase their taxes. And he obviously doesn’t understand the economy because history shows every time you cut capital gains taxes, revenues have increased, going back to Jack Kennedy. So, out of touch, yes.
For McCain, who freely admits that “the issue of economics is not something I’ve understood as well as I should,” to claim that someone else doesn’t understand the economy is rather brazen. But it’s especially audacious considering that the logic of McCain’s reading of the facts is “flawed.”
As Center for American Progress Action Fund senior fellow Robert Gordon points out, “cutting these taxes may lead to a temporary spike in revenue,” but “over the long term, the biggest owners of stock—the wealthiest Americans—will mostly save what they will save, regardless of fluctuations in the rate.” The Congressional Budget Office notes:
Rising gains receipts in response to a rate cut are most likely to occur in the short run. … Thus, even though the responsiveness of realizations to a tax cut may not be enough to produce additional receipts over a long period, it may do so over a few years. The potentially large difference between the long- and short-term sensitivity of realizations to tax rates can mislead observers into assuming a greater permanent responsiveness than actually exists.
Dean Baker, co-director of the Center for Economic and Policy Research, says “evidence that a capital gains tax cut raises revenue is rather dubious.” But it shouldn’t come as a shock that McCain would use such “dubious” rhetoric when he embraces economic theories that are “beyond the reach of economic science.”