No, Low Capital Gains Taxes Don’t Boost The Economy

If the Bush tax cuts are allowed to expire on schedule at the end of the year, the capital gains tax will increase from 15 percent to 20 percent. President Obama has called for allowing the capital gains tax, as well as the tax for dividends, to increase only on income in excess of $250,000.

The common Republican rejoinder to Obama’s policy choice is that allowing the capital gains tax to increase will hurt the economy. As conservative write David Frum reported, “Some Republicans are much more frightened of the impending rise in the capital-gains tax than of the scheduled rise in federal personal-income taxes.”

However, as Societe Generale noted, via Business Insider’s Sam Ro, there is little evidence that higher capital gains taxes hurt the economy:

As for the long-term impact, traditional arguments against capital gains and dividend taxes claim that they are detrimental to investment and therefore to long-term growth. Yet, empirical evidence suggests a very weak link between effective tax rates on capital gains and GDP. This was a conclusion of a recent report by the Center on Budget and Policy Priorities, a well regarded independent policy think-tank.

Other research has found the same thing. The Congressional Research Service, in a report that Congressional Republicans tried to hide, found no correlation between capital gains taxes and economic growth. Former White House economist Jared Bernstein noted that the capital gains tax has had no effect on investment. The University of Michigan’s Joel Slemrod found that “there is no evidence that links aggregate economic performance to capital gains tax rates.”

As billionaire investor Warren Buffett wrote in a New York Times op-ed this week, “let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased. The ultrarich, including me, will forever pursue investment opportunities.” Buffett said that the capital gains rate affects investment behavior “only in Grover Norquist’s imagination.”