The Right Policy Tool At the Right Time

The San Francisco Chronicle covers how Google's stock performance has generated a surge in tax receipts for California's treasury. More generally, the Chronicle also reviews the role that capital gains taxes play in the total personal income taxes collect by the state.

"In the late 1990s, taxes on capital gains and stock options started flooding into the state treasury. In fiscal 2000-01, they reached $17.5 billion, representing 39.3 percent of personal income tax revenues.
Thinking those gains would last, the state embarked on a spending spree. But stock-market income fell off a cliff after early 2000.
In 2002-03, capital gains and stock options contributed only $5.4 billion, or 16.6 percent to personal income tax revenues."

There are obviously many technical and contentious debates that one can have over investment tax policy, but one thing is clear within the general framework of existing tax policy - the 2003 tax cuts on dividends and capital gains were exactly the correct response to the fiscal crisis that the country faced at that time. In 2000, our economy suffered from the bursting of an investment bubble, which shut down capital investment and eradicated the jobs that supported the investment spending. A crisis of confidence exacerbated the situation as the scandals at companies like Enron and WorldCom unfolded. What was desperately needed was a reinvigoration of investment spending. Lower taxes on the components of investment return, dividends and capital gains, accomplished just that. Investment returns have rebounded, employment has rebounded, and now states' fiscal health has rebounded. Contrary to the "sop to the rich" rhetoric, the dividend and capital gains tax cuts of 2003 were a policy tool brilliantly crafted to meet the challenges at hand.