BEYOND THE NUMBERS
The Reality of Raising Taxes at the Top, Part 3: Would Tax Increases Affect Savings and Investment?
I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 [they are now 15 percent] — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.Moreover, what matters for economic growth is the impact of tax increases on national saving, or the sum of public and private saving. If the federal government devotes the revenue generated by tax increases to reducing deficits (which represent public “dissaving”), the resulting increase in public saving is likely to more than offset any reduction in private saving. That’s why the CRS concludes, “capital gains tax increases likely have a positive overall impact on national saving and investment.” Looking for a link between capital gains tax rates and economic growth more directly, tax expert Professor Joel Slemrod concluded that “there is no evidence that links aggregate economic performance to capital gains tax rates.” Similarly, capital gains tax expert Len Burman has explained on his blog, and reiterated during a conference call for journalists earlier this week that “there’s no obvious relationship between capital gains, tax rates, and the rate of economic growth.” (You can listen to the call here.) As our paper discusses, there is also no sound evidence that increasing top income tax rates depresses saving or investment. Our next installment will look at how tax increases at the top might affect small businesses and entrepreneurship.