August 10, 2007 by Tom Armstrong.

From today’s WSJ (subscription required–read it all here):

Here’s some advice to the Democrats on how to raise the revenues they’ll need to pay for all the spending they have in mind. Don’t hike the capital gains tax rate. Don’t lower it, either. Eliminate the capital gains tax entirely.

How can tax revenues be increased by eliminating a tax? It’s simple, when the tax in question is on capital gains. Capital itself exerts a multiplier effect that benefits the entire economy. Investment in new plant, equipment, business processes and whole companies creates new and higher paying jobs, and higher levels of economic activity, all of which generate additional tax revenues far in excess of what government would lose by foregoing cap-gains taxes.

This idea has broad theoretical support. Former Clinton Treasury Secretary Lawrence H. Summers has written, “the elimination of capital income taxation would have very substantial economic effects” which “might raise steady-state output by as much as 18%.” Economist Jack L. Treynor has shown that “the level of taxation on capital that is ‘fairest’ — i.e., most beneficial — to labor is zero.” And Nobel Prize-winning economist Robert E. Lucas, Jr., has concluded, “neither capital gains nor any of the income from capital should be taxed at all.” These economists think in terms of very complex models. But the real-world intuition here is quite straightforward.

The cap-gains tax is a barrier to the investment of capital. Without it, capital will flow to investments that otherwise wouldn’t have been made. The cost of eliminating the barrier is foregone revenues from that particular tax. But those revenues are small, usually deferred and non-recurring. In their place, government receives large and recurring revenues from corporate taxes, sales taxes, wage taxes and dividend taxes — all generated by new economic activity.

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August 10, 2007 by Tom Armstrong.

A short history and survey pertaining to finance and econ.

Posted in General post | 1 Comment »