More Evidence From Business Week That Trickle Down Is A Fantasy!!

Low Capital Gains Taxes May Not Help the Economy

By Brendan Greeley on October 03, 2012

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Updated with the correct rate prior to the Bush tax cuts.

For a certain kind of person (the kind, say, who invests often and well), capital gains hold a special place in their hearts, not to mention their wallets. So imagine their reaction when, just before leaving Washington to go campaigning, the Senate Finance and House Ways and Means Committees held a joint hearing on what they called the “treatment” of capital gains. That’s political speak for “taxation.” And it offers the strongest sign yet that the individual rate on long-term capital gains, which has been at 15 percent since 2003, may be up for negotiation in budget discussions after the election.

Since 1950 capital gains have generally been taxed at a lower rate than income, to spur investment. The rate under President George W. Bush went from 20 percent to 15—the lowest ever—and was billed as a way to stimulate the economy. (If nothing’s done by Jan. 1 to change tax and budget provisions already passed by Congress, the rate will snap back to 20 percent, a scenario both parties hope to avoid.) Mitt Romney wants to ditch capital gains tax altogether for people earning less than $250,000. President Barack Obama, in his Affordable Care Act, increased the rate by 3.8 percent for high earners beginning in 2013, and has proposed the so-called Buffett Rule, which would among other things end an accounting interpretation that allows private equity and hedge fund managers (and Romney) to save money by paying tax on their earnings at the capital gains rate. Neither candidate, though, contests the Bush administration’s basic logic: that a lower capital gains rate encourages investment, which creates jobs and helps the economy grow.
“If they found the relationship (between capital gains rates and growth), they’re saving it for a special time” —Leonard Burman

That doesn’t mean they’re right. Leonard Burman, who teaches economics at Syracuse University’s Maxwell School, presented a graph at the joint hearing that plotted capital gains tax rates against economic growth from 1950 to 2011. He found no statistically significant correlation between the two. This was true even if Burman built in lag times of five years. After several economists took him up on an offer to share his data, none came back having discovered a historical relationship between the rates and growth over those six decades. “I certainly did throw the gauntlet down for the true believers,” says Burman. “If they found the relationship, they’re saving it for a special time.”

More proof that the rationale behind the Bush tax cut doesn’t hold up comes from the Congressional Research Service, a nonpartisan group run by the Library of Congress. In mid-September CRS released a paper that analyzed economic growth and changes to the top marginal tax rates, both for personal income and capital gains, from 1945-2010. “The reduction in the top tax rates appears to be uncorrelated with saving, investment and productivity growth,” it concludes. “The top tax rates appear to have little or no relation to the size of the pie.”
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