@NorahODonnell: Obama Buffett rule would essentially double Mitt Romney's taxes
Do tell. I'l grant that if the millionaires minimum tax worked as advertised, Mitt Romney's effective tax rate (at the personal level!) would roughly double from 13.9% to 30%. But a notable portion of his income is capital gains, including the controversial carried interest capital gains held over from his Bain days.
The decision to sell an asset, take a gain and pay the tax is often entirely voluntary and driven by a number of factors one of which is inevitably the taxes due. E.g., per the Times we see that Mr. Romney picked up roughly $759,000 in long term gains by selling shares in Goldman Sachs. That may have been viewed as vital political window-dressing, or it may reflect a dubious view of the outlook for financial sector. But if Romney's effective tax rate were doubled, the question of selling those Goldman shares may have been decided differently, as would many of the other decisions made by Romney's investment advisors.
Which suggests that doubling Romney's effective rate will prompt him to hold some of his assets and defer gains, thereby reducing his net realized capital gains; this means his total taxes paid will not double.
The sensitivity of realizations to gains tax rates raises the possibility that a cut in the rate could so increase realizations that revenue from capital gains taxes might rise as a consequence. Rising gains receipts in response to a rate cut are most likely to occur in the short run. Postponing or advancing realizations by a year is relatively easy compared with doing so over much longer periods.
Careful studies have failed to agree on how responsive gains realizations are to changes in tax rates, with estimates of that responsiveness varying widely.
...Estimates of the revenue effects of capital gains tax changes by the Congress's Joint Committee on Taxation (JCT) and the Treasury's Office of Tax Analysis (OTA) also take into account how realizations respond to tax rates.(6) In 1990, when the Congress considered a 30 percent cut in the rate on gains, OTA estimated that such a cut would increase revenues by $12 billion over five years; the JCT projected a loss of $11 billion. If they had not factored in a realizations response, the two agencies would have estimated revenue costs of $80 billion and $100 billion, respectively--effectively illustrating how large a behavioral response is incorporated in capital gains revenue estimates.
To which I will add - there is an obvious political gaming element to this. For example, suppose a huge bipartisan majority passed a bill which raised the capital gains rate to 30% immediately and then by 1% every year for the next decade (call it the Dem Dream Act). Realized capital gains might surge as investors figured that, onerous though it may be, the rate would only go up over time.
Or as an alternative, imagine that by some quirk that dwarfed the legendary Scott Brown/ObamaCare machinations Obama actually managed to receive and sign a bill raising the capital gains rate this year. Given the history of that rate (Kennedy cut it, Reagan cut and raised it, Clinton cut it, Bush cut it) a reasonable investor might choose to wait Obama out, figuring the rate will be cut soon enough, by Obama or his successor. Realized capital gains would shrivel and the prophecy of an eventual cut would probably become self-fulfilling. Romney's effective tax rate of 30%, after being applied to a much lower income figure, might actually result in his tax bill falling. We can only imagine Ms. O'Donell's surprise.
Obama is aware of these arguments, of course, even if Ms. O'Donnell is not. Here is our Community Organizer-in-Chief addressing revenue versus fairness back in a 2008 debate:
GIBSON: All right. You have, however, said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, "I certainly would not go above what existed under Bill Clinton," which was 28 percent. It's now 15 percent. That's almost a doubling, if you went to 28 percent.
But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent.
GIBSON: And George Bush has taken it down to 15 percent.
GIBSON: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.
So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?
OBAMA: Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness.
So Obama's drama is not about raising revenue, it's about the appearance of fairness. Well, if Mitt Romney pays a 30% tax on $7 million of reported income under Obama's plan, appearances will be preserved. And his taxes will fall.