Joe Nocera of the New York Times laments that the notorious billionaires on the Forbes 400 list mainly pay capital gains tax rates. He quotes Mitt Romney saying a low capital gains rate is “the right way to encourage economic growth, to get people to invest, to start businesses, to put people to work.” Nocera claims, “there is no evidence that it is true,” and there is “no correlation” between the capital gains tax rate and the state of the economy.
Take a closer look, Joe. Plagued by slow growth, surging regulation and rising taxes, the Obama economy resembles the Carter Economy of the 1970s. In the 1950s and most of the 1960s the maximum capital gains rate was 25%. But as politics took a radical turn the top rate moved higher and higher, to 26.9% in 1968, 34.25% in 1971, 36.5% 1972- 75, and 39.875% 1976-78. Rising taxes on risky investment was part and parcel of the economic malaise of the 1970s that pushed the “misery index” (inflation plus unemployment) ever higher—from 6.77 under President Johnson to 16.26 under Carter. Venture capital pretty much dried up in the later 1970s, real stock prices plummeted, and the poverty rate rose. When Amdahl Computer, which was founded by a top IBM scientist, needed more capital in the 1970s it had to go to Japan.
One of the first big pro-capitalist reforms to correct the Carter Malaise came in 1978 with the Steiger Amendment that lowered the top capital gains tax rate from 39.875% to 28%. The stock market responded. In 1980 there was a new issues boom, focused on high tech and energy companies. One of the new issues was a company called Apple Computer; another was Genentech. In 1980 they were extremely risky investments, appropriately taxed at a lower rate. When inflation plummeted in 1982 and stock prices surged, there was another new issues boom in 1982-83. The personal computer and biotech industries were two sectors that created many jobs while energy and heavy industry, hit hard by disinflation, was hemorrhaging hundreds of thousands of jobs.
Today, as in the 1970s, a rising capital gains tax rate would throw yet another Washington Wet Blanket on the private economy, keeping unemployment high while raising little or no incremental revenue (because as tax rates climb investors take fewer gains). Say it ain’t so, Joe.
