Capital Gains and The Budget

Interesting post over at The Big Picture regarding capital gains taxes and budget surpluses or deficits.  Here's what Barry Ritholtz says.

"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 {above} 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."

My comment:  I first noticed back in the late 90's that capital gains seemed to be the driver of most of surplus under President Clinton.  There hasn't been much in the ways of tax gains from the stock market to be had in much of the past decade.  That's because anybody with losses from the two bear markets in the past 10 years could have pursued strategies to offset future gains.  We ran a series how to utilize capital losses back in the summer of 2009.  You can  link these articles at the end of this post.  Needless to say I think capital gains are going to be paltry for the forseeable future if investors and advisors handled portfolios correctly a few years ago.  Likely means no help for the budget from this.  

Article Link:  Capital Gains and the Deficit.

Links to our series:  Capital Gains & Losses Part I

Part II

Part III

Part IV    

Part V.1     Part V.2     Part V.3

Part VI

Part VII

Conclusion Taxable Accounts.

Conclusion Tax Deferred Accounts

Disclaimer:  If you actually take the time to go back and read through all of these old articles please remember a few things.  I am not an accountant and certain aspects of these rules may have changed since these articles were written.  Also some of this is my opinion on how losses should be treated.  Not all investment professionals may agree with my approach.  You should consult your own tax adviser or investment professional before taking any action that my be based on what you read here!