Monday, April 15, 2013

Do capital income taxes hinder growth?

From Prof. Chris William Sanchirico of Penn Law School and the Wharton School:
"On the surface, the growth argument against capital income taxes seems clear and compelling. And many policymakers and pundits—on both sides of the aisle—appear to regard it as common sense. A very different picture emerges, however, from the academic research on taxes and growth."
We'd disagree with the first sentence, since it doesn't seem obvious to us, for the reasons given in the last paragraph below. But the idea that has become quite prevalent is that capital income taxes discourage savings and investment and hinders economic growth. Anyway, the good professor's research bears us out:
"Scholarly evidence on the growth argument against capital income taxation is mixed at best. Indeed, it would not be unreasonable to conclude, based on the best available theory and data, that the growth argument has no real basis."
The paper finishes with a very nice analogy:
"When the negative growth effects of offsetting increases in labor income taxes or government borrowing are also taken into account, uncertainty begins to shade into doubt. Attempting to spur economic growth with tax preferences for capital income may be like trying to repair one side of the roof with shingles from the other."
Our emphasis added. It's kind of as you'd expect, really.

The answer to the question posed in the headline is: on this evidence, no.

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