Charles Gibson's Finest Hour

Editorial of The New York Sun
April 18, 2008

The big television networks take a lot of abuse for their supposed left-wing slant, but for a few moments in yesterday's presidential debate on ABC News, anchorman Charles Gibson sounded like a charter member of the Club for Growth or Americans for Tax Reform. It came when Mr. Gibson questioned Senator Obama about the capital gains tax. Mr. Gibson quoted Mr. Obama as talking about raising the tax to 28% from 15%. "But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent," Mr. Gibson said. "And George Bush has taken it down to 15 percent. 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?"

Why, Robert Bartley couldn't have put it better himself. Mr. Obama was totally flummoxed, betraying a fundamental lack of understanding of the Laffer Curve. The Democrat of Illinois spoke of the need to "finance health care for Americans who currently don't have it," and of the need to "invest in our infrastructure" and in "our schools."

Mr. Gibson, to his credit, wouldn't let the point go. "But history shows that when you drop the capital gains tax, the revenues go up," he replied to Mr. Obama. Mr. Obama replied by changing the subject, to "a housing crisis that this president has not been attentive to."

Mr. Gibson tried the same question, more or less, on Senator Clinton. She, at least, disavowed raising the capital gains rate above 20%, ruling out a return to the 28% rate contemplated by Mr. Obama. But when Mr. Gibson pressed her on why she would raise it at all, she went into lunk-headed, static analysis mode, displaying a lack of understanding as severe as that afflicting her rival. "You know, Charlie, I'm going to have to look and see what the revenue situation is," she said.

We suppose there's a remote possibility that she meant that if the government is awash in revenue, she'd consider raising the capital gains rate so as to reduce the cash flowing in from that levy. Or that, if revenue picture for the government is grim, she'd consider cutting the rate further so as to take in more revenues. But somehow we doubt that is what she was getting at.

Now, in fairness, Mr. Gibson's question slightly oversimplifies the actual effects of a cut in the capital gains tax. The tax is somewhat unusual in that it is relatively easy to control when a capital gain is realized. If it is December 1 and the rate is dropping on December 31, the owner of a business or a block of stock or a house on which the tax is due will wait and sell it in January. If the rate is going up on December 31, the owner of the same appreciated asset will rush to complete a sale before the tax increases. Remove these timing effects of activity that probably would have happened anyway, and the revenue effects of adjustments to the capital gains tax rate are less stark.

No one is claiming that if the capital gains rate were decreased all the way to 0%, revenue would increase. There is a curve, though, on which cutting the rate will increase the revenue by growing the base of revenue on which the lower rate is imposed. ABC's anchorman understands that and can articulate it. Neither Democratic presidential candidate gets it, or, if they do, they aren't willing to acknowledge it. The big question of this election — one of the determining factors, we'd even venture to say — is going to be whether the Republican standard-bearer, Senator McCain, can understand the point Charles Gibson made and convince the American people he will act on it.