Wednesday, March 21, 2012

No obvious link between capital gains tax cuts and growth - research

The Tax Policy Center in the United States has posted an article with the following graph.


For all the shrieking about how capital gains taxes stifle growth, there is the small matter of the evidence on the ground. As the authors explain:
"If low capital gains tax rates catalyzed economic growth, you’d expect to see a negative relationship–high gains rates, low growth . . . 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."
Now correlation (or non-correlation) isn't causation, as the authors readily admit. But those who argue that tax cuts spur growth need to work very hard indeed to prove their case, in the face of this evidence. The evidence, as it happens, points (very weakly) in the other direction.

In this light, one might like to consider our recent arguments about corporate tax rate cuts too, explaining why corporate tax-cutting is quack medicine.

Finally, we like these authors' summary of their findings:
"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."
Most likely, the Wall Street Journal will now publish a front page article pointing to this research, with the headline "Tax Cuts: Why We Were Wrong."

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