CBO: Revenue and Risk-Taking Could Be Tempered From Capital Gains Tax Hike

Congressional Budget Office Director Douglas W. Elmendorf recently responded by letter to an inquiry to Representative Brian Bilbray (R-CA) on anticipated revenue and other impacts of the 20% capital gains tax rate’s looming return in 2011. The CBO is a nonpartisan congressional research/analysis group that historically has been very skeptical about high capital gains taxes having a negative impact on government revenues and on innovation and economic growth.

Thus, its interesting that Elmendorf notes the distortionary impact of higher capital gains taxes on government tax receipts and on innovation and risk taking:

"Based on the historical experience, CBO anticipates that taxpayers will take steps to moderate the impact of the pending tax increase. One step will be to accelerate the realization of some gains into 2010 that otherwise would have been realized in 2011. In later years, we anticipate that taxpayers will realize fewer capital gains by holding assets longer, in some cases until death, when they can be left to heirs without any potential income tax on accrued capital gains. The shifting of gains from 2011 into 2010 will reduce revenues modestly over that two-year period, as well as speed up their payment. In later years, the reduced realizations will keep revenues from rising in proportion to the increase in the tax rate. On net, we project that federal revenues will increase in response to the higher tax rates, but that reduced realizations will temper that increase…."

"The higher capital gains taxes could have an additional effect by discouraging innovation and risk-taking, but there is insufficient evidence on which to base a quantitative estimate."

Less revenue, less risk-taking. An administration interested in jump starting the economy should not put a chilling effect on entrepreneurship that has inspired the Silicon Valley boom and other Horatio Algers over the last several decades.