Low Capital Gains Taxes May Not Help the Economy

For a certain kind of person (the kind, say, who invests often and well), capital gains hold a special place in their hearts, not to mention their wallets. So imagine their reaction when, just before leaving Washington to go campaigning, the Senate Finance and House Ways and Means Committees held a joint hearing on what they called the “treatment” of capital gains. That’s political speak for “taxation.” And it offers the strongest sign yet that the individual rate on long-term capital gains, which has been at 15 percent since 2003, may be up for negotiation in budget discussions after the election.

Since 1950 capital gains have generally been taxed at a lower rate than income, to spur investment. The rate under President George W. Bush went from 20 percent to 15—the lowest ever—and was billed as a way to stimulate the economy. (If nothing’s done by Jan. 1 to change tax and budget provisions already passed by Congress, the rate will snap back to 20 percent, a scenario both parties hope to avoid.) Mitt Romney wants to ditch capital gains tax altogether for people earning less than $250,000. President Barack Obama, in his Affordable Care Act, increased the rate by 3.8 percent for high earners beginning in 2013, and has proposed the so-called Buffett Rule, which would among other things end an accounting interpretation that allows private equity and hedge fund managers (and Romney) to save money by paying tax on their earnings at the capital gains rate. Neither candidate, though, contests the Bush administration’s basic logic: that a lower capital gains rate encourages investment, which creates jobs and helps the economy grow.