Wharton Public Policy Initiative has published its second PPI Issue Brief series, with Do Capital Income Taxes Hinder Growth?, written by Chris William Sanchirico, Professor of Law, Business and Public Policy
Penn Law School and the Wharton School. The brief is available for free download in PDF format.
New Year’s Day was the start date of a new Medicare contribution tax, passed in 2010 as part of health care reform, which imposes on high income taxpayers an additional 3.8% tax on capital income generally, including dividends and capital gains. These tax increases bring to the fore a set of commonly held reservations regarding the taxation of income from savings and investment. Principal among these is the concern that taxing capital income hampers
economic growth and job creation.
According to this view, raising taxes on capital income discourages savings and investment. A diminished flow of savings and investment causes, in turn, slower growth in the economy’s stock of capital goods, such as plant and equipment. And when the capital stock grows more slowly, so too do output, employment, productivity, and wages.
On the surface, the growth argument against capital income taxes seems clear and compelling. And many policymakers and pundits—on both sides of the aisle—appear to regard it as common sense. A very different picture emerges, however, from the academic research on taxes and growth.
About Issue Briefs: PPI publishes issue briefs at least once a month, tackling issues that are varied but share one common thread: they are central to the economic health of the nation and the American people. PPI Issue Briefs are nonpartisan, knowledge-driven documents written by Wharton and Penn faculty in their specific areas of expertise.