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Mainstream Economics Support Low Taxes on Capital Income

2 min readBy: Alan Cole

It was curious to read the way – 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 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. es 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 baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. s 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.