With 2017 just around the corner and state policymakers beginning work on next year’s legislation in earnest, it’s worth pausing to review recent trends in state taxation to glean hints of what to expect in the year to...
- The Tax Policy Blog
- Mainstream Economics Support Low Taxes on Capital Income
Mainstream Economics Support Low Taxes on Capital Income
It was curious to read the way Vox.com - a new media project designed to help people "understand the news" better - framed the debate on capital income taxation. Describing the arguments for low taxes on capital income, Vox's Matthew Yglesias wrote the following:
The other relates to economic growth. Lowering taxes on investment income should make people more likely to invest their money. In theory, if people saved and invested more there would be more capital available for business investment which could grow the economy and make everyone better off in the long run. Traditionally, most economists have accepted this view, but surveys of the profession show growing doubts that it’s correct.
This might give the impression that a large number of economists now disagree with the traditional view on capital income. To support the claim, Vox cites the IGM Economic Experts Panel, which surveys forty respected economists on economic questions, such as whether a system with lower taxes on capital income create economic growth.
The best-known economists on each side of this tax debate happen to be represented on the panel. The traditional view is associated with Kenneth Judd of Stanford University, whose academic work has centered on the argument described above. The opposite view - that taxes on capital income do not harm growth any more than taxes on labor income - is represented by Berkeley's Emmanuel Saez, who is well known for his work on inequality and taxes.
The results of the poll were lopsided, among those economists with a definitive opinion. Thirteen other members of the panel agreed with Judd's view, while only four agreed with Saez's view. Many of the panelists declined to commit to either view. Yglesias’s remarks only make sense if one lumps in the uncommitted economists with the “doubters.”
In fact, the IGM panelists frequently decline to commit fully on issues for a variety of reasons, such as not having reviewed the literature on the question. Economics is a broad field, and not everyone has read everything or has an opinion on everything. Epistemological modesty is not an opportunity to put words in people’s mouths.
It is unsurprising that the majority of those who committed to an opinion landed with Judd. The overwhelming bulk of the evidence is that taxes have a negative effect on economic growth, and that the effect is particularly strong on tax bases that include capital income.
What is surprising is that finding five economists out of forty who disagree is what passes for "growing doubts" these days.
Get Email Updates from the Tax Foundation
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.