CHART OF THE DAY: There's No Link Between Capital Gains Tax Rates and GDP

Business Insider ^ | Nov. 28, 2012, 8:27 AM | Sam Ro

[ExxonPatrolUs]

The prospect of higher investment tax rates (on capital gains and dividend income) is on every investors' mind lately.

As it stands, Bush era tax cuts will expire by the end of the year sending the long-term capital gains tax to 25 percent from 15 percent and the dividend income tax to north of 39 percent.

Conventional conservative wisdom suggests higher taxes would be bad for the economy.

But the empirical evidence is less clear. Societe Generale writes about it in a note to clients today:

In terms of the macro impact, the dollar amounts involved are small and will have no meaningful influence on disposable income over the course of the year. Furthermore, most of the investment income tends to accrue to high-income earners who arguably have lower spending multipliers. We therefore don’t anticipate any meaningful impact on aggregate demand in the short- and medium-term. As for the long-term impact, traditional arguments against capital gains and dividend taxes claim that they are detrimental to investment and therefore to long- term growth. Yet, empirical evidence suggests a very weak link between effective tax rates on capital gains and GDP. This was a conclusion of a recent report by the Center on Budget and Policy Priorities, a well regarded independent policy think-tank.

Here's SocGen's chart showing almost no correlation.

[Fledermaus]

Oooooh, can I play? I have charts showing the amount of toilet paper I use to wipe my a$$ has no correlation to the GDP!

[Uncle Miltie]

Correct; it’s Hauser’s law.

On a separate subject, do you agree that the tax wedge effect exists generally, and that increasing taxes will increase the wedge and decrease total economic activity?

[ksen]

“On a separate subject, do you agree that the tax wedge effect exists generally, and that increasing taxes will increase the wedge and decrease total economic activity?”

I haven’t really studied the one you posted yet. I’ll take a look in a bit.

[Ohioan]

Further to your point, we all hoped that when Communism collapsed in Eastern Europe, the American Left would see the point, and desist; but they never missed a stroke. In the event, it turned out that the largest group who appear to have actually believed the premises of Marxist Communism, were in American Universities.

The past election demonstrates the terrible effect on American youth-conditioned like so many Pavlovian dogs, to betray the heritage that made their good lives--up until now--possible.

The coming awakening here--when it does in fact come--will be a rather frightening prospect for a great many "useful idiots."

William Flax