Are lower taxes on gains and dividends good for the economy?
Like many people, I'm reading a lot about whether letting the 2001 and 2003 tax cuts is good or bad. Unlike many people, I haven't made up my mind yet, and am working through it. I'm posting some thoughts here in hopes that you, dear reader, will offer some of your own.
I'll start with Glenn Hubbard's Wall Street Journal article, which argues that capital and dividends shouldn't be taxed at all. Hubbard (who was chairman of the Council of Economic Advisers under President G.W. Bush) says that " There are at least four channels through which Mr. Bush's tax reform (proposed and passed) raised the long-run productive capacity of the economy—that is, increased the size of the pie."
Is it me, or is it hard to argue that the U.S. economy hasn't done so well over the past several years? Yes, GDP has grown, but on the whole I don't find the economy of the 2000s as compelling evidence of the power of any kind of policy.
Also, when it comes to dividends and capitals gains, I wonder what percentage are actually taxed. A huge percentage -- perhaps the majority? -- of stocks are held in IRAs and 401(k)s or by institutions (such as pension funds and endowments) that aren't taxed. I suspect that a minority of Americans actually pay taxes on dividends and capital gains, and, yes, most of those people are likely wealthier. (If you have evidence to the contrary, please let me know.)
Finally, I wonder why investments should be taxed at lower rates than labor? Why is one given preferential treatment over the other? They're both important.
Post your own thoughts, links to studies, etc., below.