Blast from Past: The Capital Gains Tax Rate Doesn’t Correlate With Investment

January 20th, 2015 at 8:26 am

What with the President ready to announce both a higher tax rate on cap gains–28%, up from 24%, and the same rate that prevailed under Reagan–I was reminded of the conclusion of University of Michigan economist Joel Slemrod, a leading expert in this sort of thing, that “there is no evidence that links aggregate economic performance to capital gains tax rates.”

So here’s a blast from my own past taking an evidentiary dive into the issue, looking for correlations between levels and changes in the capital gains rate and business investment and coming up short.

I’m not naive enough to believe that evidence will win the day, but the historical record should pretty quickly convince you that our economy can do fine with a 28% top tax rate on capital gains.

Here’s a useful summary of these issues by my CBPP colleagues Marr and Huang.


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5 comments in reply to "Blast from Past: The Capital Gains Tax Rate Doesn’t Correlate With Investment"

  1. Dave says:

    I think the confusion over this in popular discussions was actually created largely by Clinton. Under his authority, it becomes well-known that lowering the capital gains rate actually creates higher capital gains tax revenue. Everyone knows this is true now, and this is what gets sighted in most discussion on the topic. It might be partially true in the short term, and if it is still true there are things that can be done to change that.

  2. Tyler says:

    With consummate cynicism, Obama, in his State of the Union address tonight, is expected to call on Congress to pass tax increases on capital gains and on the biggest financial firms to fund tax credits for childcare and college tuition. The effort is a political fraud, since the president knows that the Republican-controlled Congress will not pass any of these proposals.

    • Dausuul says:

      So what you’re saying is that Democrats should only call for things that Republicans find acceptable?

    • Dave says:

      Obama knows exactly which parts of his economic agenda can pass this congress:
      1) TPP

      But if he lays out a coherent plan that lifts everyone, I think he’s betting that he can get progressives on board, considering that the TPP is only a small part of the plan. Of course, it is the only part he’s really adamant about getting done.

      I’m glad he’s laying out a plan though. The key is to mean it and stick to it regardless of the politics. That is something he’s never done, and I don’t expect it this time either, nor do I expect it from a new Clinton admin, given the historical record.

  3. Fred Donaldson says:

    Most IRA and 401K investors may be under the impression that their current equities in mutual funds will benefit from a lower capital gains tax when they retire.. Not True!

    All the sheltered retirement money withdrawn is taxed as regular income, so if capital gains were 90%, IRA withdrawals would still be taxed at regular rates of 15%, 25%, etc. You might also be subject to additional income tax on your Social Security benefits, regardless of whether the withdrawals were from capital gains, dividends, interest or just sitting there as cash.

    Selling a low capital gains tax as an extra tax boon to saving for retirement is misinformation, unless the funds are outside of an IRA or 401K.

    Congress should examine the unfairness to a retired couple, who report more than 32K, are taxed on the next dollars at 50% more than taxpayers, who are not retired, up to as much as 100% of their Social Security benefits. There is much talk about the very rich suffering from a possible rise in capital gains tax, but no little or no kindly attention to middle class retirees (who still oddly vote almost as a block for the GOP).