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 per cent from 15 per cent and the dividend income tax to north of 39 per cent.
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 centre on Budget and Policy Priorities, a well regarded independent policy think-tank.
Here’s SocGen’s chart showing almost no correlation.