First let me dispel one myth about capital gains tax cuts: They do NOT pay for themselves.
Yes, I know G.W. said this is what happens. Even his own treasury secretary doesn't agree with him. There's a good reason.
Repeat: Major cuts in capital gains tax DO NOT pay for themselves.
On some level I can understand why a network TV news anchor with a 7 figure salary -- and presumably A LOT of investment income would be obsessed with this question. Raising the capital gains tax will have an impact on high wage earners -- especially people like Chuck Gibson and George Stephanopolous.
Second, what Gibson says does contain one ounce of truth. Cutting capital gains does tend to increase wealth and incomes -- it puts more money into the economy.
Here's a simple illustration of how Gibson's argument works:
As a hypothetical, let's imagine that a person is earning $10 of investment income which is taxed at a 30 percent rate.
Under those conditions the tax revenue gained would be $3. Simple enough (.30 times $10 equals $3).
Now if we cut capital gains from a 30 percent rate to say 20 percent -- the net impact will likely be an increase the amount of taxable income in the economy.
In the $10 example, if we were to cut rates 10 percent, there's a pretty good chance that the benefit would increase that $10 amount the next year so that the amount of taxable income shoots up an additional $1 (not a great return, but pretty good). So the new taxable income becomes $11 -- taxed at a 20 percent rate that nets a total of $2.20 of tax revenue.
In other words, by lowering the tax rate we have increased the wealth of investors (which is good) -- which in turn off-sets what would have been a $1 loss in revenue thanks to the rate cut to a loss of only 80 cents in tax receipts.
If the economy is churning along; the median wage is rising; and the national debt is going down -- this is all well and good. I personally have no problem with the tax cut.
Problems enter the picture though when we have a situation where we are running up massive budget deficits. That 80 cents in lost revenue effectively is an interest free loan with the lion's share of benefit going to those who are really well off with a lot of investment income -- with the long-term rates and the tab for the rate cut effectively being picked up down the line by future generations.
In order for a capital gains cut to pay for itself in the hypothetical situation there would need to be a corresponding $5 increase in taxable income in order to off-set the impact of the tax cut (e.g. $5 + $10 equals $15 taxed a 20 percent rate equals $3 of tax revenue).
Unfortunately, in the real world this never happens, so the real impact of the rate cut is that more debt is dumped on future tax payers.
Needless to say, it took Newt Gingrich and company less than two years to undo Reagan's reform and go back to the old system of enforcing the Leona Helmsley dictum that "taxes are for the little people".
Someone with a diversified stock portfolio using a buy and hold strategy who reinvests capital gains and dividends over 10-15 years will always get a higher rate of return on their money than someone who keeps it in a compound interest savings account for the same duration. I would love to encourage more people to invest in the market for this reason, mainly because it encourages them to save and build their wealth rather than just collecting debt. IRAs are a great tool for encouraging people to invest in the market for retirement because they essentially defer taxes, but I'd like to provide middle-income families with greater opportunity to build wealth in the market with investments that they can draw upon for reasons other than retirement--like saving up money to make a downpayment on a bigger house, for instance. The individual rate of saving is at the lowest level it's been since the Great Depression, and that's not good--it means that we shouldn't only worry about the effect on public debt, but on individual debt as well.
I guess where I differ on the stock market is that I don't believe it should only be a game for millionaires but a tool for anyone who wants to patiently grow a nest egg over time, and consequently I'd rather use the Reagan model and tax it at the same rate as all other personal income. That way the tax is assessed along the same progressive model as personal income.
Gibson was saying that when capital gains tax rates are cut, treasury receipts tend to go up. I suspect this is true. As capital gains tax cuts wend their way through the system, I'll bet people tend to hold onto assets a bit longer, and then sell them once the cut is enacted, generated a spike in capital gains and, therefore, receipts.
Of course, a tax increase would presumably have the same effect, as people sell long-term capital assets to avoid the higher rate.