The Lower Capital Gains Tax Rate, Globalization and American Decline
Part of the reasoning behind the lower capital gains tax is we want more investment into the businesses of tomorrow.
The problem is that lower capital gains taxes haven’t led to more investment.
In the context we’re using here, capital formation refers to capital used for investment purposes, so in its nickel version the argument for low capital gains rates is that it encourages capital to be invested. This is a good thing, and if it were true it would be a powerful argument for low taxes on capital gains. But it’s not. Jared Bernstein provides the chart below, which shows the growth of investment over time (blue line) and the capital gains tax rate (red line):
There’s pretty much no correlation at all. Investment increases over time at a steady rate regardless of what the capital gains tax rate is.
I don’t think we’re really getting anything out of that concept, are we? Instead of more investment, what we’re getting is distorted investment; we’re not investing in ways that lead to any kind of trickling down of wealth formation to the masses. Whatever wealth formation we’re seeing from investment is either being sucked up in productivity (which hasn’t been presenting itself in the last decade), sucked up into the pockets of the wealthy (income growth has grown exponentially among the top 1%, and especially the top .1% in the last decade), or outsourced out of the US. So far, what we’re seeing is that the rich are getting richer and we’re getting a distorted financial sector and I believe it’s leading to more acute globalization than our economy can handle.
I’ll leave the rich are getting richer for another day and settle on the issue of jobs.
It’s no coincidence that the financial sector began growing when the rest of the economy began net outsourcing the type of jobs the poor and middle class do. Just as the financial sector began to grow, jobs were outsourced and then a bubble formed in the housing industry (the one industry that could be forced to grow because it can never be outsourced), and that hid the fact we were going to face a severe number of job losses throughout the entire time. It’s no wonder at all why we have growth yet jobs are nowhere to be found. I bet if we do excuse taxes on foreign-made profits so companies can repatriate their profits in the US, we’d get a ton of money fed into the pockets of CEOs, stock holders and some of it held as cash just like Apple had has been. It won’t lead to more jobs because industry in the US is gone and there isn’t anything new to invest in other than technology, pharmaceuticals, and pretty much little else that would create jobs for low skilled or even reasonably skilled labor.
While most economists would argue that globalization is a good thing (I believe it ultimately is a good thing.), I would question whether such an acute amount of market change is healthy. Our economy is clearly suffering from it.