The Myth That Low Capital Gains Rates Are Very Important to the Economy

Testifying today before a joint House-Senate hearing on the tax treatment of capital gains, tax policy expert Leonard Burman said, “The heated rhetoric notwithstanding, there is no obvious relationship between tax rates on capital gains and economic growth,” as this chart shows.

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He went on to explain:

Does this prove that capital gains taxes are unrelated to economic growth? Of course not. Many other things have changed at the same time as tax rates on capital gains and many other factors affect economic growth. But the graph should dispel the notion that capital gains taxes are a very important factor in the health of the economy. Cutting capital gains taxes will not turbocharge the economy and raising them would not usher in a depression.

This echoes a new Congressional Research Service report I blogged about yesterday, which found no statistically significant correlation, all the way back to 1945, between the top capital gains or top marginal income tax rates and:  (1) economic growth (in real per capita GDP); (2) private saving; (3) investment; or (4) growth in labor productivity.

For more on the myth that low capital gains taxes are an economic silver bullet, see our new report.