The Relationship Between Capital Gains And Economic Growth

Find Out whether or not lower taxes on capital gains promote economic growth.

Mitt Romney admitted on Tuesday that he pays less tax because most of his income is derived from his investments rather than from his wages. Investment incomes are only subjected to 15 percent withholding tax as opposed to the 35 percent tax rate that top employees pay. Romney’s concession reignited the debate as to whether the tax rate on capital gains should be that low.

Jared Bernstein is of the opinion that there is no clear way of showing that low taxes on capital gains promote investments. James Pethokoukis, on the other hand, claims that reduced tax on capital gains spur investment which create more jobs and improves the economy.

The last eight decades has seen a significant reduction of tax rate on investment income. The tax rate for this type of income was highest in 1977 at 39.9 percent. The prevailing rate is now just 15 percent. From these figures, it is clear that people still make investments regardless of the prevailing tax rate.

The New York Times also published an article about this very issue. Warren Buffet claimed that the prevailing tax rate does not make much difference for real investors. From the thousands of investors he has worked with in his long career, Buffet claims that investors never shied away from investing, even when the rates were highest in 1977.

Len Burman and Troy Kravitz of the Urban Institute have shown that over the last five decades, there hasn’t been any relationship between economic growth and tax rates on capital gains.

Tyler Cowen, an economist also has the same take on the issue. He claims that changes to the tax rate on capital gains usually affect investments that have already been made rather than new ones. Some people are of the opinion that a change in rates of taxes might increase 2012 taxes.


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