Re: Cutting the Deficit by Cultivating Growth

by Veronique de Rugy

George Mason University economist Tyler Cowen disagrees with my assessment of the impact of the capital gains tax cut in 1997 on economic growth. He writes:

Why think the Capital gains tax cut gets the credit? With loss offsets in the tax code, isn’t the real rate on capital gains pretty low in any case?  And the last decade had a relatively low (nominal, published) capital gains rate but not fantastic growth results. Also, keep in mind that the biggest effects of a cut (or hike) in capital gains rates are on old capital, not new capital. New capital (and other factors) drives growth.  But the incidence of capital gains taxes on new capital is largely, through incidence, bounced onto consumers and labor.

I think he may be right. Darn. And then there is this:

Arguments that the maximum CGT tax rate affects economic growth are even more tenuous: Capital gains rates display no contemporaneous correlation with real GDP growth during the last 50 years. Although the effect of capital gains on economic growth may occur with a lag, Burman (1999) tests lags of up to five years and finds no statistically significant effect. Moreover, any effect is likely small as capital gains realizations have averaged about 3 percent of GDP since 1960 and have never been more than 7.5 percent.

What do you guys think? I’d be interested in any argument you may have against or in favor of this paragraph.