"Only tax rises can fix America's budget mess" is the headline of a piece by Steven Rattner in the Financial Times. Mr. Rattner advocates what he calls "sensible tax increases," including an increase in the 15% rate that applies to dividends and long-term capital gains and a repeal of all the George W. Bush income tax cuts, not only those for upper-income earners.
Mr. Rattner wants to go back to Clinton-era tax rates. "The economy boomed," during the Clinton years, he argues. Fine: if the Clinton years were so wonderful, how about going back to Clinton-era spending levels, which in nominal dollars were $1.789 trillion in 2000, less than half the $3.8 trillion President Obama budgeted for 2011?
Mr. Rattner doesn't mention that the Clinton-era economy only really started booming once Mr. Clinton stopped raising taxes and started cutting them via the tariff reductions of NAFTA and, importantly, the 1997 law cutting the long-term capital gains tax rate to 20% from 28%. It wasn't Mr. Clinton's tax increases that helped the economy grow, it was his tax cuts. There was nothing magical about the 20% Clinton capital gains tax rate; what was important was that the direction it was headed was downward.
Nor does Mr. Rattner mention a 2008 study by Ernst & Young for the American Council for Capital Formation, a group that advocates lower capital gains taxes, that compared the 15% capital gains rate to other countries. That study found that Thailand, Taiwan, Singapore, Netherlands, Malaysia, India, Hong Kong, Germany, Belgium, and Indonesia all tax capital gains at a 0% rate. Japan's 7% rate is lower than America's, as is Canada's, at 14.5%. Raising the rate on capital gains would make America less competitive compared to those other countries. An increase in taxes on dividends and capital gains would also hurt the stock market. That would worsen the overall American economy via a kind of reverse wealth-effect, and it would also worsen state and local fiscal situations, as pension funds would become even more underfunded.