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Benefits of Tax Breaks for Capital Gains and Dividends Don’t Justify the Costs

The New York Times “Room for Debate” feature takes a closer look this week at House Budget Chairman Paul Ryan’s call for an end to taxes on capital gains, interest, and dividends in his Roadmap for America’s Future, the fiscal plan he released in 2010.  The Times asks “…would eliminating taxes on investment and savings help the economy grow, or would it simply create more inequality and debt?”

In my contribution, I note that:

The costs are clear.  Tax rates on capital gains and dividends that are lower than those on ordinary income encourage tax lawyers and accountants to create schemes to transform, on paper, “ordinary income” into capital gains and dividends.  Time, talent, and resources that could be used productively are instead poured into tax avoidance, creating a drain on the economy.

I also point out that there’s no evidence that the tax breaks for capital gains and dividends contribute to economic growth at all, let alone enough to outweigh their costs.

For more on why preferences for capital gains should be reduced or eliminated, see our chart book on the ten things you need to know about the capital gains tax.