TaxProf Blog

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

Monday, March 18, 2013

Sanchirico: Common Sense, Capital Income Taxes, and Growth

Following up on my previous post, Do Capital Income Taxes Hinder Growth?:  Chris William Sanchirico (Pennsylvania), “Common Sense” Aside, What Do We Really Know About Capital Income Taxes and Growth?:

If you’re discussing tax policy with someone who asserts that his or her point is “just common sense,” this could indicate one of two things: Either no deep thought is required—as the person would have you believe. Or no deep thought has been applied. The “common sense” notion that capital income taxes hinder growth seems to be more a case of the latter. Long term capital gains are taxed only when the asset is sold and at roughly half the rate on wages and salaries. Dare to suggest that the rate on investment profits could be raised a bit—so that perhaps the rate on labor income could lowered—and you’re liable to be reprimanded for failing to understand something as plain as the nose on your face: To tax capital income is to tax the reward for saving and thus to discourage saving. Less saving means less investment and less investment means slower growth, fewer jobs, and lower wages.

Everyone knows that.

Everyone, that is, except the people who study the issue.

Economic theory teaches that the impact of capital income taxes on savings is robustly ambiguous. Empirical research has yielded mixed results, but overall the data seem to indicate that reducing capital income taxes decreases rather than increases savings. In addition, lowering capital income taxes is likely to go hand in hand with raising labor income taxes or government borrowing, both of which are arguably at least as harmful to growth as capital income taxation. ... [T]rying to spur growth by keeping capital income taxes low seems—at best—like trying to fix one side of the roof with shingles from the other.

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This is a minority view among economists:

Posted by: Will McBride | Mar 19, 2013 10:26:19 AM

A minority of 40 economists surveyed in one survey, with some fairly obvious selection bias, sampling, and instrument validity issues.

I believe Sanchirico is referring to what the peer reviewed economics literature shows, not what people who happen to have a PhD in economics but haven't specifically studied this issue casually think might be the case.

Posted by: Anon | Mar 22, 2013 7:29:24 AM

And even then, the survey showed that only 45 percent of the economists think there are benefits to taxing capital at a lower rate. Which means that's a view held by a "minority" of the economists surveyed.

Posted by: Anon | Mar 22, 2013 7:31:34 AM