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Study Reinforces Impact of Capital Gains Tax

Posted by Heather Edwards on September 23, 2010

Allen Sinai’s newly-published study,“Capital Gains Taxes and the Economy,” underscores the empirical claim that lower capital gains taxation has a positive effect on macroeconomic performance. His research, published by the American Council for Capital Formation, simulates increases and reductions in capital gains taxes over a period of five years, and estimates resulting effects on U.S. jobs growth, debt, inflation, financial markets, and overall macroeconomic health.

Here are some of the findings, as stated in Sinai’s September 21, 2010 Wall Street Journal article,”Capital Gains Taxation: Less Means More:”

▪ Hiking capital gains tax rates would cause significant damage to the economy.

Raising the capital gains tax rate to 20%, 28% or 50% from the current 15% would reduce growth in real GDP, raise the unemployment rate and significantly reduce productivity. These losses to the economy outweigh any gains in tax receipts from the increase in the capital gains tax rate.

For example, at a 28% capital gains tax rate, economic growth declines 0.1 percentage points per annum and the economy loses about 600,000 jobs yearly. If the capital gains tax rate were increased to 50%, real GDP growth would decline by 0.3 percentage points per year, and there would be 1.6 million fewer jobs created per year. At a 20% capital gains rate compared with the current 15%, real economic growth falls by a little less than 0.1 percentage points per year and jobs decline about 231,000 a year. Smaller increases in the capital gains tax rate have smaller effects on the economy, but the effects are still negative.

Higher capital gains taxes will not substantially reduce the deficit.

The net impact on the federal budget deficit of a reduction in the capital gains tax rate to 0% is a decline in tax receipts of $23 billion per year after the positive effects of stronger economic growth on payroll, personal and corporate income taxes are taken into account. This is significantly less than the $30 billion per year static revenue loss estimate, which does not include feedback effects. A capital gains tax reduction to 0% produces new jobs at a cost of $18,000 per worker, far less than might occur from many other proposals.

The bottom line is that any capital gains tax increase is counterproductive to real economic growth. To the contrary, a reduction in the capital gains tax rate would be a pro-growth fiscal stimulus that creates new jobs and new businesses, funds entrepreneurship, reduces the unemployment rate, increases productivity, and in the long run brings in more payroll taxes. In the case of capital gains taxation, less means more.

What Washington decides to do about taxes matters, especially in today’s economy of high budget deficits, very low net job gains, and an unemployment rate hovering around 10%.

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