TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, March 20, 2012

Burman: Capital Gains Tax Rates and Economic Growth

Leonard Burman (Syracuse University, Maxwell School), No Obvious Relationship between Capital Gains Tax Rates and Economic Growth:

If you read the editorial page of financial newspapers, you might conclude that no aspect of tax policy is more important for economic growth than the way we tax capital gains.  You’d be wrong.

The chart displayed above shows top tax rates on long-term capital gains and economic growth (measured as the percentage change in real GDP) from 1950 to 2011. If low capital gains tax rates catalyzed economic growth, you’d expect to see a negative relationship–high gains rates, low growth, and vice versa–but there is no apparent relationship between the two time series.  The correlation is 0.12, the wrong sign and not statistically different from zero.  I’ve tried lags up to five years and also looking at moving averages of the tax rates and growth.  There is never a statistically significant relationship.

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However, there is a pretty tight correlation between the capital gains tax rate and the happiness of the biggest individual political donors in this country, which is why we keep talking about it.

Posted by: John | Mar 20, 2012 5:08:04 AM

John: that would make for a great graph, if there was some way to graph it.

Posted by: Justin | Mar 20, 2012 9:51:36 AM