Do Low Capital Gains Taxes Spur Investment?

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From Ezra Klein:

Eric Jackson, a former employee of PayPal and now the CEO of the online-investing platform CapLinked, worries that implementing the “Buffett rule” would hurt the pool of investment money available to tech start-ups. His logic on this point is unimpeachable: If the Buffett rule means taxing capital gains more like normal income, then it will, on the margin, hurt investment of all kinds, including investment in tech start-ups.

Hmmm. “On the margin” is doing a lot of heavy lifting here. I’ve never seen any compelling evidence that higher capital gains rates have more than a minuscule effect on investment. Changes in rates can have short-term effects as investors rush to sell assets before new rates takes effect, and high rates can also produce a modest “lock-in” effect, in which investors hold on to assets in order to avoid taxation.

But the long-term effects appear to be very small, and low rates have a serious drawback: they spur a huge amount of unproductive tax sheltering as wealthy taxpayers spend time trying to figure out how to redefine ordinary income as capital gains. This is not just useless, it’s positively damaging. What’s more, capital gains already get favorable tax treatment just by virtue of the fact that gains can accumulate year after year tax free. You only have to pay taxes when you sell, and the net effect of this is a low effective tax rate compared to income that you have to pay taxes on as it’s earned.

My own take is that capital gains rates should, perhaps, be a bit lower than ordinary income rates, but only a bit. Maybe 30% or so, compared to 35% or 40% for ordinary income. I’d sure like to hear the case that a lower rate really has any significant long-term negative effects on investment or capital formation.

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In this election year unlike any other—against a backdrop of a pandemic, an economic crisis, racial reckoning, and so much daily crazy—Mother Jones' journalism is driven by one simple question: Will America will move closer to, or further from, justice and equity in the years to come?

If you're able to, please join us in this mission with a donation today. Our reporting right now is focused on voting rights and election security, corruption, disinformation, racial and gender equity, and the climate crisis. We can’t do it without the support of readers like you, and we need to give it everything we've got between now and November. Thank you.

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