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:
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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.
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.
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.
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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.