No Obvious Relationship between Capital Gains Tax Rates and Economic Growth
If you read the editorial page of financial newspapers, you might conclude that no aspect of tax policy is more important for economic growth than the way we tax capital gains. You’d be wrong.
The chart displayed above shows top tax rates on long-term capital gains and economic growth (measured as the percentage change in real GDP) from 1950 to 2011. If low capital gains tax rates catalyzed economic growth, you’d expect to see a negative relationship–high gains rates, low growth, and vice versa–but there is no apparent relationship between the two time series. The correlation is 0.12, the wrong sign and not statistically different from zero. I’ve tried lags up to five years and also looking at moving averages of the tax rates and growth. There is never a statistically significant relationship.
Does this prove that capital gains taxes are unrelated to economic growth? Of course not. Many other things have changed at the same time as gains rates and many other factors affect economic growth. But the graph should dispel the silver bullet theory of capital gains taxes. Cutting capital gains taxes will not turbocharge the economy and raising them would not usher in a depression.
Low capital gains tax rates do accomplish one thing: they create lots of work for lawyers, accountants, and financial geniuses because there is a huge reward to making ordinary income (taxed at rates up to 35%) look like capital gains (top rate of 15%). The tax shelters that these geniuses invent are economically inefficient, and the geniuses themselves might do productive work were the tax shelter racket not so profitable. And the revenue lost to the capital gains tax loophole adds to the deficit, which also hurts the economy.
Thus, it’s no surprise that there’s no obvious relationship between capital gains tax rates and economic growth. Indeed, the low rates on gains might do more harm than good.
PS, The data in the chart above are available upon request. Email me and I’ll send you the spreadsheet. (And if you find something that I missed, tell me and I’ll post an update.)
This first appeared on my Forbes blog. If you’d like to receive my Forbes blog posts by email, click this link.
Normally I do not read article on blogs, but I would like to say that this write-up
very forced me to try and do so! Your writing style has been amazed me.
Thank you, quite nice post.
It is perfect time to make some plans for the long run and it’s time to be happy. I’ve
read this submit and if I could I desire to recommend you some attention-grabbing things or advice.
Perhaps you can write subsequent articles relating to this article.
I want to read more things approximately it!
[...] Daniel Patrick Moynihan Professor of Public Affairs at Syracuse University, recently presented a graph showing no correlation between tax rates and economic growth from 1950 to 2011. There was no [...]
[...] those of you that know me know that I really care about the data itself. Here’s where the third post comes into play. In the post, Len Burman, a professor of public policy at Syracuse University, [...]
[...] plus juste de trouver de nouvelles sources de revenus et que, contrairement aux idées reçues, taxer plus fortement le produit du capital n’est pas en tant que tel nuisible à la croissance [...]
[...] et vice versa – or il n’en est rien », explique l’économiste Len Bunman, s’appuyant sur un graphique qui montre l’absence de corrélation entre le niveau de taxation du capital et la croissance [...]
C’mon guys….leave the “class warfare” to the political blogs. There have always been mega-rich people spending stupid amounts of $$$ on stuff most of us might think is rediculous, and there always will be. Is $984K for McQueens faux racing suit any sillier than tens of millions of $$$ for a painting no one can understand? But admit it or not, it’s those “one percenters” who pay most of the federal income tax bill.Pesonally, I appreciate their contributions to the cause, because without them, we;d all be paying a lot more.
[...] Len Bunman, l’économiste qui a mis en ligne ces chiffres sur le site du Tax Policy Center, le département de la Brookings dédié à l’étude de la fiscalité (en association avec [...]
[...] Taxation InsightGood News For the More Affluent Home Seller: Federal Tax Exemption Extended For Two More Years!2010 1040 Form and 1040 Online Tax preparationUnion Budget 2012- Direct Tax Budget Proposal part-1TaxVoxloveClawOptions.DomainName='pappalardomerrill.com';loveClawOptions.LicenseKey='29M-595-2GB';loveClawOptions.ButtonStyle=13;loveClawOptions.HeaderLabel='Facebook It:';loveClawOptions.SocialSite=1;loveClawOptions.ExitHTML='Thanks for Sharing!';loveClawOptions.ImageURL='http://pappalardomerrill.com/wp-content/uploads/2012/03/extended-tax-deductions.jpg';loveClawOptions.API='wp2.20';loveClawOptions.ButtonLabels=['I love it','I hate it','Interesting','Shocking','I don't care']; Cufon.replace('h1',{ fontFamily: 'Enigmatic' }); Cufon.replace('#logo h1',{ fontFamily: 'Bebas' }); Cufon.replace('#logo #sitetagline',{ fontFamily: 'Droid Sans' }); Cufon.replace('h2',{ fontFamily: 'Bebas' }); Cufon.replace('h3',{ fontFamily: 'Aller' }); [...]
please you should add the current account deficit, inflation, and unemployment
the correlation will give a different result
[...] : Tax Policy Center, cité par "Le [...]
[...] Len Bunman, l’économiste qui a mis en ligne ces chiffres sur le site du Tax Policy Center, le département de la Brookings dédié à l’étude de la fiscalité (en association avec [...]
[...] Source [...]
Might you also conclude from your statements that anything other than a flat tax creates inefficiencies and distortions as individuals (i) seek counsel on how to lower their tax burden and (ii) invest in policy-favored industries (housing, oil, ag, alternative energy, etc.) creating bubbles and unnecessary goods?
Thanks for the post Len. While one of those profiting from deferring / minimizing taxes I do find it facinating that pundits trying to figure out a way to spur growth through tax policy ignore this, and much other statistically valid research that contradicts their points.
More interesting is the possibility of a relationship between the top dividend tax rate and various measures of worker well-being (wages, unemployment, plant closings, demand pull inflation, union membership, attempted adverse labor actions – i.e. union busting).