NCPA - National Center for Policy Analysis

Lower Taxes on Capital Get You More

November 6, 1995

Although Republicans control congress, Democratic liberals still control the rhetorical climate; hence congress' proposed tax reduction package is balanced between families (per child tax credit) and investors (reduced capital gains tax), as if the two groups were people with diametrically opposed interests.

Robert E. Lucas, the 1995 Nobel prize-winner in economics, points out that if the United States followed the supply-siders' advice and eliminated taxes on capital altogether, we could all eat the biggest genuinely free lunch ever.

When the cost of capital is lowered, you get more of it, and the result is higher labor productivity and higher incomes. Lucas estimates that, conservatively, eliminating capital income taxation would increase capital stock by about 35 percent.

  • People would experience a gain in their economic well-being equal to twice the gain that would result from eliminating a 10 percent rate of inflation.
  • The benefit would he 10 times the gain from eliminating all product-market monopolies.
  • It would be 20 times the economic gain from eliminating the recessions an inflationary booms of the business cycle.

The tax on capital gains brings in only $30 billion toward a $1.5 trillion budget, and eliminating it would benefit families far more than a $500 tax credit by accelerating economic growth.

Source: Paul Craig Roberts, "Capital Gains: Time for Sound Policy, Not Sound Bites," Business Week, November 6, 1995.


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