Thursday, October 21, 2010

Capital Gains are NOT the Key to Economic Growth

This is a persistent fiction. It is encountered frequently, as it is used by conservatives to explain to the middle class why they should care about capital gains tax rates for the rich. Simply put, the economic theory is as follows: economic growth comes from investment - investment comes from capital gains - lowering capital gains taxes allows increased investment - increased investment results in increased economic growth.

I could explain how this economic theory fails in terms of economic theory. Arguing about where investment money goes and how economies grow. But, that isn't necessary at all. The frustrating part of this conservative economic fantasy, is that it ignore history. Basic, simple, recent history.

Conservative economists like to live on the blackboard. Which means they like to explain their economic theories in a way that sounds good, but never test these theories in the laboratory of history. This is how conservative economists can still manage to insist that free market economics prevents racism and sexism in the work place. Despite the fact that we know that both of these things have co-existed for decades. So it is with capital gains taxes and economic expansion.

The historical reality is simple: the tax rates that Republicans insist will destroy our economy are very similar, if not identical, to capital gains tax rates we had in the 80's and 90's. That's right, those decades of economic disaster. Somehow, despite taxing the rich for doing us the favor if having investments that make money, our economy still managed to expand. It's almost as if it's labor, and not wealth, that drives economic expansion . . . but, I digress from the main point.

The point is simple: economists should not be able to get away with this. This isn't rocket science. We all live in the world. Everyone reading this remembers the 90's. It is not hard to think back and realize that taxing capital gains like we did in 1996 isn't going to destroy the economy.

So good. Now no one will ever make that claim ever again. Problem solved.

If you're interested in the numbers, you can find some here:

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