This always strikes me as a conversation that would benefit from doing a little less in the way of time-slice comparisons and a lot more in terms of looking at the other side of the equation. If you cut capital gains taxes, that requires either reduced spending or increased taxes elsewhere or increased borrowing. If you do what the Bush administration did and reduce taxes on investment income purely by borrowing money, it’s extremely difficult to see how that’s supposed to increase overall investment. By contrast, if you finance your capital gains tax cut by reducing SNAP and WIC benefits, it’s hard to see how that wouldn’t increase overall investment. To be sure, you’d be stealing food out of the mouths of poor children to offer a regressive tax cut, but the net impact will be to increase the national savings rate. Conversely, if we impose a federal excise tax on the sale of smartphones and computers and use the money to fund a sovereign wealth fund, the national savings rate will go up and the distributive impact will be progressive. A national sales tax to fund construction of a nationwide high-speed rail network would obviously increase investment in the passenger rail sector. So on and so forth.
Now none of this is to deny that important empirical questions exist to quantify the magnitude of the impact of these different changes. The point, however, is that even on the very broad econ 101 “if you tax savings more you’ll get less savings” level, you have to look at the entire policy shift. My view is that a lot of the debate around this question tends to be pretty fake. You could not finance the entire US government with a progressive consumption tax, but it would easy to sit down with the Joint Tax Committee and write a revenue-neutral bill to reduce capital gains taxes and make up the lost revenue with a progressive consumption tax. And yet none of the many members of congress who claim to have extremely high estimates of the behavioral response to tax rates and who claim to believe the US suffers from a tax code that’s unfriendly to investment have written such a bill. There’s not so much as a pie-in-the-sky proposal. As with Bush’s 2003 deficit financed tax cuts, the actual agenda clearly has to do with the short-term welfare of high income people and not the long-term investment/consumption balance.