Mitt Romney in his 60 Minutes interview defended low capital gains tax rates.
ROMNEY: It is a low rate. And one of the reasons why the capital gains tax rate is lower is because capital has already been taxed once at the corporate level, as high as thirty-five percent.But where did he get the idea that low capital gains rates encourage investment or economic growth? If you think about this, this isn't a tax you pay when you invest. You can invest, and stay invested for a very long time, without ever paying this tax. You only pay the tax when you sell. But selling isn't investment, it's disinvestment. Do we really need tax policy to encourage disinvestment?
PELLEY: So you think it is fair?
ROMNEY: Yeah, I -- I think it's -- it's the right way to encourage economic growth, to get people to invest, to start businesses, to put people to work.
Aside from which, we've been reducing capital gains rates now for years. Is there any evidence that this has ever increased investment?
I would say not.
More below the orange fractal set.
Consider also what else Mitt is promising in his "5 point plan", which is supposed to be designed to create jobs. As Paul Krugman put it last week:
Let’s look at that plan, shall we? It’s:Number four here seems to me to be putting the cart before the horse. Creating jobs will cause growth and will lower the deficit. But cutting deficits doesn't create jobs, even if you do decide how you are going to cut. The "school choice" part also seems to be about something other than jobs.
1. Energy independence, presumably through weakened environmental regulation
2. School choice
3. Trade agreements, plus implicit China-bashing
4. Deficit reduction, not explained how
5. Lower taxes on small businesses (but actually just on the rich), and repealing health reform
First of all, this isn’t a “plan for the middle class”. And do you see anything in there that can “help families in concrete, practical ways”? I don’t. Even if you believed that the Romney plan would yield prosperity, the benefits to middle-class families would come through trickle-down — and assertions that Bush-style policies are just what we need aren’t going to give Romney the boost he wants.
That leaves the Romney plan, as Paul Krugman points out, essentially "trickle-down". Well, that and "drill baby drill". But again, there is nothing new here. We've had multiple rounds of passing trade agreements, cutting top level income tax rates, cutting inheritance taxes, deregulating, and "reforming entiltements" now for years. As a result, we now have record levels of wealth inequality, a poverty rate that is "the highest level in almost two decades" (per businessweek), and the rich are richer than ever.
So where's the investment?
Here's domestic investment again, both gross and net, as a percentage of GDP:
But even that is a bit misleading, as it includes housing, which was in a bubble in the 2000s. If we want to exclude that, we can look at nonresidential fixed investment, again both gross and net, as a percentage of GDP:
Net nonresidential fixed investment, which averaged over 4% of GDP prior to 1980, has fallen to about 1% of GDP in 2011. And it has fallen steadily, aside from a brief surge during the Clinton administration.
All of this data direct from Bureau of Economic Analysis tables. Percentages computed by dividing the data in table 5.2.5 "Gross and Net Domestic Investment by Major Type" by GDP per table 1.1.5.
A Modest Proposal for a Debate Question
In the light of the above, I would like to suggest a question that I would hope might be asked of Mr. Romney in the upcoming debates.
Question for Governor Romney: Governor, you have suggested that low capital gains rates encourage investment, and you have also proposed as part of your plan to create jobs, new trade agreements, in addition to keeping those capital gains rates low. But we have had a few rounds of capital gains cuts over the last 30 years, and multiple trade agreements, and yet net domestic investment levels are not even a third of what they were in the decade prior to 1980. Some might even argue that low rates on sales of capital have only encouraged disinvestment, and combined with free trade agreements, have simply allowed for more tax breaks for those who sold U.S. investments, and shipped jobs overseas. My question is what will be different this time? Do you have any ideas to keep those job creating investments in the domestic economy?
Of course we know the answer is no. Mitt's ideas seem only seem to make sense for you if you are someone who is selling investments in the US, and buying factories in China. In other words, if you are someone like Mitt.