Wednesday, September 26, 2012

Thank you, Mitt Romney, for making us care about capital gains taxes

Back in 1999, I produced a chart showing the relationship between capital gains tax rates and economic growth in my book, The Labyrinth of Capital Gains Tax Policy: A Guide for the Perplexed (p. 81). Some economists had made miraculous claims for the effects of lower tax rates on the economy, which I argued should be apparent in time series data.  The correlation between the two time series was basically zero.  I've updated this chart periodically (for example, here), but it never got much attention until I included it in my congressional testimony last week.  In the last two days, columnists at the Washington Post and New York Times have cited the chart and my testimony.

My wife, Missie, asked why there's been such a surge of interest.  I think it's Mitt Romney's 14 percent effective tax rate, which comes largely from the light taxation of capital gains and dividends.  So thanks, Mitt Romney, for getting Americans to care about the way we tax capital gains.

Here's the press coverage (aka shameless self-promotion):

Ruth Marcus, “Romney’s tax plan,by the numbers” (Washington Post, 9/26)
Leonard Burman of Syracuse University’s Maxwell School looked at capital-gains rates over six decades and found no correlation with economic growth. Look at his graph and you’ll see: The two lines — capital-gains rates and growth — bear no relation to each other.

Burman tried adjusting for time lags, of up to five years, and looking at moving averages of tax rates and growth. Still no correlation. “There is no apparent relationship,” Burman told the Senate Finance Committee last week. “Cutting capital gains taxes will not turbocharge the economy, and raising them would not usher in a depression.”

Joe Nocera, “Romney and theForbes 400” (New York Times, 9/25)
In 2009, according to recent Congressional testimony by Leonard E. Burman, a professor at Syracuse University, the 400 highest-income taxpayers reaped an astounding 16 percent of all capital gains.
In the printed copy of his Congressional testimony, Burman has a chart that plots the ups and downs of the economy since the 1950s with changes in the capital gains rate. There is no correlation between the two. The idea that a lower capital gains rate spurs economic growth is one of the enduring myths of conservative thought.

Ezra Klein, “The case for raising capital gains tax rates” (Washington Post (Wonkblog), 9/25)
Tax expert Len Burman has graphed capital gains rates and economic growth and found no relationship at all.  Burman says he also “tried lags up to five years and using moving averages, but there is never a larger or statistically significant relationship.” 

What he is sure of is that a very low capital gains rate incentivizes very complex tax avoidance. “Since ordinary income is taxed at rates up to 35 percent while long-term capital gains are taxed at a maximum rate of 15 percent, there is a 20 percent reward for every dollar that can be transformed from high-tax compensation, say, to low tax capital gains.”

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