Leonard Burman, professor of economics at Syracuse University's Maxwell School, presented a graph at a joint hearing of the Senate Finance and House Ways and Means Committees on the "treatment" of capital gains, that plotted capital gains tax rates against economic growth from 1950 to 2011. He found no statistically significant correlation between the two. This was true even if Burman built-in lag times of five years.
In mid-September, the Congressional Research Service (a nonpartisan group run by the Library of Congress) released a paper that analyzed economic growth and changes to the top marginal tax rates, both for personal income and capital gains, from 1945-2010. "The reduction in the top tax rates appears to be uncorrelated with saving, investment and productivity growth," it concludes. "The top tax rates appear to have little to no relation to the size of the pie."
The 1986 tax reform ushered in by President Reagan pegged capital gains at the same rate as the highest personal income bracket, which was reduced from 50 to 28 percent. According to David Brockway, who served as chief of staff of Congress's Joint Committee on Taxation during the negotiations for the 1986 overhaul, any difference between the rates will always drive people to come up with creative ways to hide income as an investment. "Allegedly, a mouse can fit through a crack in the wall a quarter-inch wide," he says, "and if you leave a sixteenth of an inch, you get cockroaches."
Data from the Tax Policy Center shows that 70 percent of long-term capital gains goes to the top 1 percent of earners, and that 47 percent goes to the top .01 percent. Mitt Romney wants to eliminate the capital gains tax altogether for people earning less than $250,000/year, while President Obama's Affordable Care Act (Obamacare) increases the capital gains rate for high income earners by 3.8 percent beginning in 2013, and Obama has proposed the Buffett Rule, which would, among other things, end an accounting interpretation that allows private equity and hedge fund managers (and Romney) to save money by paying tax on their earnings at the capital gains rate. Obama's efforts are a step in the right direction.
Much of the above information comes from a Bloomberg Businessweek article titled, "Keep Looking for the Economic Benefit" written by Brendan Greeley in this week's Politics & Policy section.
