Wild swings in capital gains tax revenues prove that these taxes are not only an immoral form of double-taxation – but a completely unpredictable form of government revenues, too.

WASHINGTON – According to the most recent projections, the federal budget deficit will jump to $160 billion this year. And in Washington, D.C., the fingers are pointing everywhere and the political blame game is on.

But who is really the culprit for the deficit, when just one year ago the same economic soothsayers predicted a surplus of 8% of federal revenues? The culprit is not a person, but the tax on capital gains.

Capital gains tax revenue is highly unstable because it is closely associated with year-to-year fluctuations in the stock market. During the booming late \’90s, stock prices increased significantly and capital gains revenue also increased, at the federal and state levels. Thus, when capital gains tax predictions of $98 billion earlier this year were downgraded to $75 billion when the stock market tanked, and an extra $23 billion in deficit spending emerged.

When the economy slows and stock prices fall, capital gains revenues decline significantly (See box). As a result, the slowdown of volatile capital gains revenue is exacerbating the revenue shortfall we now face. Capital gains tax revenue is also nearly impossible to forecast, as conventional techniques of revenue estimation are less applicable, because the acquisition of such income depends on decisions by the taxpayer, such as when to sell those shares of stock.

Thus, the reliance on capital gains revenue by the federal and state governments has significantly increased budget deficits. In California, for example, capital gains tax revenue declined by $10.5 billion in one year, which has led to Governor Gray Davis offering massive increases in taxes to offset the difference. Now, budget analysts at the White House and in Congress are experiencing the same problem.

"Capital gains taxes are not only an immoral form of double taxation," said taxpayer advocate Grover Norquist, who heads Americans for Tax Reform (ATR) in Washington, "but the evidence shows them to be a particularly masochistic revenue source for the budgetmeisters, as well. All this shows that bad policy equals bad politics, and cap gains taxes should be abolished on both the state and federal levels."