Poizner and a Capital Gains Tax Cut

Joel Fox
Editor and Co-Publisher of Fox and Hounds Daily

Soon after taking over the position as Speaker of the Assembly, Karen Bass held a meeting at the Los Angeles Chamber of Commerce to discuss ideas to improve California’s desperate fiscal situation. I believe her plan was to convince members of the business community that more revenue was needed and to seek suggestions on how to go about getting it. In other words, which taxes can we raise?

I offered what I said would probably sound like a counter intuitive proposal: Cut the capital gains tax. In cutting that tax I suggested more revenue would come quickly into the government for the tax cut would convince holders of assets that this was a good time to sell their assets and receive the tax benefit. I said that capital gains cuts usually generated some quick revenue.

Another participant at the meeting challenged my statement saying that was not always the case. I turned to an economist who studies the California economy and asked for his opinion. In cautious terms his bottom line answer backed me up saying that, yes, the record shows that capital gains cuts usually boosted government revenue in short order.

Which is a long introduction to say I was intrigued by the large capital gains tax cut put forth by gubernatorial candidate Steve Poizner as part of his platform for job creation and economic growth.

Poizner had a number of tax cuts in his proposal including 10% across the board reductions in the personal income tax rates, as well as 10% cuts in the state sales tax and corporation tax. But he saved his largest cut for capital gains tax rates. He said capital gains taxes should be cut in half.

Under the current tax code, capital gains are taxed at the individual’s marginal income tax rate. This was not always the case in California. Poizner explained that “these high capital gains tax rates have inhibited investment in California’s economy and stunted economic growth, particularly during the current economic crisis…This tax cut will encourage entrepreneurship, create jobs, and grow our economy.”

You can read the entire Poizner tax plan here.

Critics will assail the Poizner tax proposal claiming the tax cut will further emasculate state programs; that the state cannot take such a large hit at one time that would amount to about 10% of its general fund. Poizner argues the revenue lost by the tax cuts will be made up almost immediately by increased economic activity. Even if some tax cuts in the proposal are phased in, the one tax cut that could have instant impact on revenue growth is the capital gains tax cut.

There is plenty of historical evidence that tax cuts do produce more revenue. And this evidence is not just from modern times. As I have noted here before, fourteenth century Arab statesman and historian Ibn Khaldun wrote: “At the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.”

The place to start producing larger revenue from smaller assessments is with that “counter intuitive” idea of a capital gains tax cut.

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