Capital Gains and economic growth

I’ meant to highlight this a while ago, but with much talk on Mitt Romney’s tax rate of late, it’s important to really spread the word that there’s pretty much no evidence that such preferentially low capital gains rates serve to accomplish anything other than to help really rich people stay really rich.  Ezra summarized the evidence on the matter:

Jared Bernstein, on the other hand, brings the graph to suggest that there’s never been a clear relationship between the capital gains tax rate and investment:


(Real investment is in natural logs to show proportional growth over this long time series.)

The top tax rate on investment income has bounced up and down over the past 80 years — from as high as 39.9 percent in 1977 to just 15 percent today — yet investment just appears to grow with the cycle, seemingly unaffected.

So is the capital gains tax rate really so insignificant? Perhaps. Back in August, the New York Times ran a piece on this very topic. Warren Buffett, for one, claimed that the tax rate on investment income doesn’t make much of a difference to actual investors: “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.”

Meanwhile, Troy Kravitz and Len Burman of the Urban Institute have shown that, over the past 50 years, there’s no correlation between the top capital gains tax rate and U.S. economic growth — even if you allow for a lag of up to five years. “Moreover,” they add, “any effect is likely small as capital gains realizations have averaged about 3 percent of GDP since 1960 and have never been more than 7.5 percent.”

Yeah, it’s wonky, but it’s important, because Fox News viewers and such will defend this low rate as if there’s lots of evidence it leads to greater economic growth. But that evidence just isn’t there.   So, maybe Mitt Romney really should pay a higher tax rate than Warren Buffett’s secretary.

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About Steve Greene
Professor of Political Science at NC State http://faculty.chass.ncsu.edu/shgreene

3 Responses to Capital Gains and economic growth

  1. We have the highest corporate rate of tax in the world which puts us at a huge disadvantage in the world market. These taxes have to be added to the cost of goods and services. For those of you who don’t know it is a whopping 35%. Is it any wonder that so many businesses have fled overseas taking their jobs with them You libs just don’t get it.

    A lower capital gains tax enables people to reinvest their profits in businesses. How long will it take and how many more businesses have to leave the country until you libs get it. California is a prime example of high taxes on weathy citizens and business. They are FLEEING THE STATE leaving it in much worse condition. They are in huge deficits. Get a clue will you
    Johhn Wilder

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