Megan McArdle has a discussion of the effect of capital gains tax rates on revenue collected. Her overall point is good, that a examination of capital gains revenue collection (at the very least) fails to disprove the idea that cutting the rate might have increased revenues.
Then, alas, it seems that she must establish her credibility by attacking “supply-siderism”:
Now, I’d be the last person to suggest that correlation is causation–I’m only pointing out that if they didn’t raise revenues, you couldn’t prove it by this graph. Moreover, there is a not-ridiculous argument that over the long term–five, ten years–they do raise revenues, by spurring capital formation and economic growth. This is very different from the supply sider argument that you could jam personal income tax rates to 1% and enjoy higher tax revenues therefrom.
The idea that cutting capital gains rates spurs capital formation and economic growth isn’t far from the supply-side argument, it’s exactly the supply-side argument, although most supply-siders would suggest that it would take less than five to ten years. The idea that you could increase revenues by cutting income tax rates almost to zero is ridiculous. I don’t know of anyone who believes that.
Moreover, we should remember Hauser’s Law, which observes that overall tax revenues (as a fraction of GDP) are remarkably insensitive to tax rates. Consequently, nearly any policy that improves the economy increases revenue. Whether Hauser’s Law would remain true at rates as low as 1% seems very unlikely, but it’s certainly the case that we haven’t found its bottom yet. We ought to be looking.
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