Do Capital Gains Taxes Drive the Budget Deficit?

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Jim Bianco has an interesting thought on Cap Gains:

“Since the Tax Reform Act of 1986, capital gains taxes have been highly correlated to the budget deficit. The chart below shows capital gains is a driving force of revenue into the Treasury.  Thanks to the recent financial crisis that affected stocks, bonds and real estate, there are fewer capital gains to tax and government revenues are suffering.  State and local governments have a similar problem (but to a smaller degree) because of their reliance on real estate taxes and the inability to raise assessments because of the slump in home prices.”

This is obviously a correlation issue. The causative factor in budget deficits, at least on the income side, is impacted by the economic cycle. Recessions equal weak earning equals market sell off.

Hence, it is not cap gains, but the underlying causes. Regardless, it is interesting to see Cap Gains as indicative of economic cycles and government tax revenue.

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