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View Diary: The Lie Behind Capital Gains Tax Rates (41 comments)

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  •  Capital Gains Cuts Discourage Investmemt (0+ / 0-)

    Low capital gains rates also don't encourage ownership of capital assets, they only encourage sales of capital.  Thus, they encourage disinvestment, not investment.  There is ample evidence of this in academic literature. You only get the break when you sell.  

    If we really wanted to encourage people to hold capital investments, then we would cut rates on taxes that apply when you actually hold investments, like corporate profits.  Consider for example, Laura Tyson's proposal (registration required) to offset lower corporate taxes by raising the rates on dividends and capital gains:

    A lower rate would stimulate investment, narrow the tax preference for debt over equity financing and weaken the incentives for international companies to move production to lower-tax locations. But lowering the corporate tax rate is expensive – each percentage point reduction would cut revenues by about $120bn over 10 years...
    A more efficient and progressive way to pay for a lower corporate tax rate would be to increase taxes on dividends and capital gains. This would shift more of the burden towards capital owners and away from labor, which bears the burden in the form of fewer jobs and lower wages.
    Now I'm sure progressives could come up with more direct ways to even the playing field, rather than lower corporate taxes.  How about tariffs on those goods from overseas companies so they can't move to avoid taxes?  Higher minimum wages? Better protection for unions? Lower payroll taxes?

    But Tyson's proposal is the sort of thing the more moderate Republicans of 30 years ago at least might have supported.  Romney, Ryan, and today's Republican party are so far in the pockets of the rich that they want them rewarded even when they are clearly destroying jobs.  

    As for encouraging investment, that argument is a laugh.  We know damed well that the best way to encourage investment is to increase demand.  This is why when inflation and interest rates rise, investment increases more than consumption.  Note the tight relationship between the investment to consumption ratio (blue line) and one year treasury rates (red line).  

    http://research.stlouisfed.org/...

    So the two policies that would clearly increase investment right now are:
    1. momnetary policy setting a higher inflation target, or a GDP target (QE3 is a start, but not enough).
    2. fiscal stimulus

    Yes, these would encourage consumption, but they would increase investment even more. Investment is always driven from the bottom up, not the top down.

    No one can possibly believe that the conservative "supply side" policies  we have been following since the "Reagan revolution" increase investment, without ignoring all actual economic evidence.  There has simply been a huge investment draught in this country since the adoption of these ideas.  Net private domestic investment has declined steadily, to about 1% of GDP in 2011, down from about 4% of GDP prior to 1980.  And the Net Stock of Fixed Assets is trillions less than it would be at the 1980 percentage of GDP.

    Low tax rates on the wealthy job destroyers (like Mitt Romney), combined with free trade, have almost completely eliminated investment in this country.  

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