# Does an increase in the capital gains tax = stifling investment? **URL:** \ **Category:** Great Debates\ **Created:** [May 27, 2014, 6:12pm UTC](https://boards.straightdope.com/t/does-an-increase-in-the-capital-gains-tax-stifling-investment/689391 "2014-05-27T18:12:18Z")\ **Posts on this page:** 4\ **Page:** 2
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [May 30, 2014, 4:35pm UTC](https://boards.straightdope.com/t/does-an-increase-in-the-capital-gains-tax-stifling-investment/689391/21 "2014-05-30T16:35:55Z")
> [@puddleglum](#): > > What it means in absolute numbers is that if you raise taxes on property 10% then people will adjust their behavior and the tax revenue will go up 8%, if you raise the rate on income tax revenue will go up 6% and if you raise the rate on capital gains 10% revenue will dip temporarily and then go up 2%. This proves the argument that if you tax the rich more they will stop working as much. Since the any reduction in the revenue raised is caused by foregone economic activity as a result of the tax then the smaller the elasticity the less economically harmful the tax is. Thus since elasticity is highest for capital gains, taxes for capital gains should be the lowest. > There is also an justice reason for treating different types of income differently, but that is outside of the scope of the thread. The Monopoly game was created to illustrate this. > > GDP is made up of three parts, consumption, government and investment. Consumption is currently about 71% of GDP which is historically nearly an all time high, government spending is about 18%, and private investment is about 12.4% which is 12% lower than it was before the recession. Startups in Silicon Valley may be doing okay but business investment as a whole still has not recovered. Just to note here that the investment spending part of the GDP does not involve stock purchases. [url\http://www.investinganswers.com/financial-dictionary/economics/gross-domestic-product-gdp-1223]From here: > [@](#): > > Investment Spending: > – Nonresidential (spending on plants and equipment), Residential (single-family and multi-family homes) > – Business inventories [/quote] Obviously consumption will be far greater than investment. What’s important is the delta. And consumption fell during the recession, and has still recovered only moderately. If you want more real investment you need more consumption to drive it. That an X% increase in capital gains taxes won’t produce an X% increase in revenue is hardly surprising - but you can’t look at this in isolation. If that 6% drives more consumption and thus more investment and thus more jobs, increased tax revenues and decreased costs for unemployment and food stamps might product a far better result. As we’ve seen in Europe, reducing government expenditures and thus increasing unemployment can make things worse. So you can’t look at revenue from the capital gains tax in isolation - if it drives money to more productive investments, it might more than pay off. When you said rich buying an investment, I took it as buying stock or some such. That does not get counted. If they put that money into a new factory it would - but until there is a production shortage, they’d be foolish to do that. ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [May 30, 2014, 5:28pm UTC](https://boards.straightdope.com/t/does-an-increase-in-the-capital-gains-tax-stifling-investment/689391/22 "2014-05-30T17:28:52Z")
If we have to drop the effective tax rate on billionaires to -10%, then we’re doing it wrong. Capital gains taxation should be (1) sharply increased, and (2) only levied on those who derive a majority of their income from investments. ---
**Author:** ![puddleglum](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/puddleglum/32/137_2.png) [@puddleglum](https://boards.straightdope.com/u/puddleglum)\ **Post date:** [May 30, 2014, 6:23pm UTC](https://boards.straightdope.com/t/does-an-increase-in-the-capital-gains-tax-stifling-investment/689391/23 "2014-05-30T18:23:48Z")
> [@Voyager](#): > > Just to note here that the investment spending part of the GDP does not involve stock purchases. [url\http://www.investinganswers.com/financial-dictionary/economics/gross-domestic-product-gdp-1223]From here: Obviously consumption will be far greater than investment. What’s important is the delta. And consumption fell during the recession, and has still recovered only moderately. If you want more real investment you need more consumption to drive it. That an X% increase in capital gains taxes won’t produce an X% increase in revenue is hardly surprising - but you can’t look at this in isolation. If that 6% drives more consumption and thus more investment and thus more jobs, increased tax revenues and decreased costs for unemployment and food stamps might product a far better result. As we’ve seen in Europe, reducing government expenditures and thus increasing unemployment can make things worse. So you can’t look at revenue from the capital gains tax in isolation - if it drives money to more productive investments, it might more than pay off. When you said rich buying an investment, I took it as buying stock or some such. That does not get counted. If they put that money into a new factory it would - but until there is a production shortage, they’d be foolish to do that. [/QUOTE] Nothing can be consumed unless its produced first and investment is needed for production. It is a chicken and egg question. Government expenditures are not productive investments, for the most part they are consumption. The problem with deadweight loss is not the loss of government revenue for the most part it is the foregone economic acitivity. Returns on investments are price signals that show the market where capital is most needed. If cronut bakeries are yielding above average returns than that means the market is demanding more of them. If people are foregoing investments or changing their investments due to taxes ,and the CBO numbers they are, then the market signals are distorted and the economy suffers. Since capital gains taxes are the most distortionary they harm the economy more than any other and should thus be the lowest. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [May 30, 2014, 7:35pm UTC](https://boards.straightdope.com/t/does-an-increase-in-the-capital-gains-tax-stifling-investment/689391/24 "2014-05-30T19:35:39Z")
> [@puddleglum](#): > > Nothing can be consumed unless its produced first and investment is needed for production. It is a chicken and egg question. > Government expenditures are not productive investments, for the most part they are consumption. The problem with deadweight loss is not the loss of government revenue for the most part it is the foregone economic acitivity. Returns on investments are price signals that show the market where capital is most needed. If cronut bakeries are yielding above average returns than that means the market is demanding more of them. If people are foregoing investments or changing their investments due to taxes ,and the CBO numbers they are, then the market signals are distorted and the economy suffers. Since capital gains taxes are the most distortionary they harm the economy more than any other and should thus be the lowest. GDP includes new investment. If your cronut factory can make a million cronuts a month, and demand is for 750K, you will not be expanding your factory, and a tax cut for investment will go into your pocket, not into the factory. If however half the tax cut was eliminated and the revenue was used for food stamps, perhaps those with more money for food would buy more cronuts, with demand increasing to 1.25 million a month. At this point you would put some of that tax cut into investment, expanding your plant and hiring more workers. As I said to Sam, if there is a shortage of capital to meet investment needs, then a policy of increasing available capital makes sense. That is not where we are today. My example shows how government policies can lead to the need for increased investment without the government investing directly. However direct government investment in infrastructure such as roads can help business be more efficient, and investment in research can lead to massive return on investment, with the internet being the obvious example. With the bundle of cash people are sitting on now getting very low returns, I doubt they are forgoing investment due to taxes, since they’d make more even after taxes than they are now. [Previous page](https://boards.straightdope.com/t/does-an-increase-in-the-capital-gains-tax-stifling-investment/689391.md?page=1)