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Thomas Sowell | Prophets and Losses: Part II





People on both sides of tax issues often speak of such things as a "$300 billion tax increase" or a "$500 billion tax decrease." That is fine if they are looking back at something that has already happened. But it can be sheer nonsense if they are talking about a proposed increase or decrease in the tax rate.

The government can only raise or lower the tax rate. Whether the actual tax revenues that the government will collect as a result will go up or down is a matter of prophecy. And these prophecies have been far too wrong far too often to base national policies on them.

When Congress was considering raising the capital gains tax rate from 20 percent to 28 percent in 1986, the Congressional Budget Office advised Congress that this would increase the revenue received from that tax. But the Congressional Budget Office was wrong, not simply about the amount of the tax revenue increase, but about the fact that the capital gains tax revenue actually fell.

There was nothing unique about this example of tax rates and tax revenues moving in opposite directions from each other — and also in opposite directions from the predictions of the Congressional Budget Office. Reductions of the capital gains tax rates in 1978, 1997 and 2003 all led to increased revenues from that tax.

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