Capital gains are taxed lower than other types of incomes in several nations.The rationale I have heard for this is that a lower tax on capital gains is supposed to encourage investment and increase the economic growth.

Is there any hard data on whether this effect exists and how large it is?

5 Answers 5


There is a pretty in-depth paper written in 2010 by the widely respected and non-partisan Congressional Research Service (which is part of the Library of Congress) here.

TL;DR Version - No, there is no real effect on the economy as a whole from changes in capital gains tax rates. If there were, it potentially could be inverse (lowering taxes hurts growth).

A quick summary of points from the paper:

  • Higher capital gains (CG) tax rates discourage realizations (selling off the stock) but not necessarily investment. This generally makes the markets less efficient as normal selling behavior is inhibited. This behavior has been observed at the macro level.

  • There is an associated argument that lowering rates actually increases the revenue, since the observed rate of decrease in realization is higher than the increase in the rate - i.e. there could be a "sweet spot" of moderate tax rate but high realizations

  • There is a counterargument to the above that the increases in CG tax may be offset by reductions in other tax revenues as investors shift assets to the lowest tax-burdened vehicle

  • There is little evidence to support the argument that lower rates increase high-risk investment - in 2003 only 10% of venture capital investors were non-institutional

  • "...[C]apital gains tax rate reductions are unlikely to have much effect on the long-term level of output..." - long term economic growth is unaffected one way or the other by CG rates within their historical bands

  • "A tax reduction on capital gains would mostly benefit very high income taxpayers who are likely to save most of any tax reduction..." - There's no evidence that CG tax decreases stimulate short term growth either, since short term growth requires increased demand.

  • Some economists suggest a short-term CG tax decrease could hurt short term growth since it adds incentive to sell stock but not to buy again, reducing the capital pool available for investment.

  • @DVK - All references are in the linked report from the CRS
    – JNK
    Dec 21, 2012 at 15:19
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    @DVK The relevant portion is at the end of the text: A temporary tax cut could induce investors to sell stock (i.e., realize capital gains by reducing the lock-in effect), but provides no incentive to invest since investors know they will face higher tax rates in the future. To the extent that the resulting sell-off depresses stock prices, consumer confidence, already low during recessions, could be further undermined thus reducing consumer spending
    – JNK
    Dec 21, 2012 at 15:20
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    For some reason he doesn't apply the same logic to government (that if they get more revenue from tax, they will simply spend it all instead of saving) that he insinuates about private sphere. Again, no supporting data.
    – user4012
    Dec 21, 2012 at 15:43
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    @DVK Not to argue this too much, but there IS supporting data - the author of the paper cites nineteen separate sources for his conclusions.
    – JNK
    Dec 21, 2012 at 15:56
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    Not for the main conclusions. I read most of the paper.
    – user4012
    Dec 21, 2012 at 16:02

What is available from the historical record seems to indicate that in fact capital gains being taxed at a lower rate than average income has no statistically significant impact on the economy at large. From a recent Business Week article's analysis of a recent Congressional hearing on the matter:

Leonard Burman, who teaches economics at Syracuse University’s Maxwell School, presented a graph at the joint hearing that plotted capital gains tax rates against economic growth from 1950 to 2011. He found no statistically significant correlation between the two. This was true even if Burman built in lag times of five years. After several economists took him up on an offer to share his data, none came back having discovered a historical relationship between the rates and growth over those six decades.

In fact, the idea that the capital gains tax should be lower than the income tax rate in order to spur investment is itself a novel idea that hasn't even been around that long. When Ronald Reagan lowered the top income tax bracket's rate from 50% to 28%, he also raised the capital gains tax rate to 28%. From the same article, we see that Reagan wanted the entire tax package to be revenue-neutral, "and bumping up the capital gains rate seemed an easy way to raise money."

In more recent times, the Simpson-Bowles came to the same conclusion and argued that the income tax and capital gains tax rates should move in tandem.

  • Did Burman control for other variables? BW doesn't seem to go into many details.
    – user4012
    Dec 21, 2012 at 16:01
  • Also worth noting that in the U.S. there have never been lower capital gains rates available to C corporations despite the fact that C corporations make most capital investments, and the depreciation recapture limits the relevant of capital gains rate reductions for real estate investment. In the U.S., lower capital gains tax rates largely function to reduce double taxation on corporate earnings in a kludge-like manner.
    – ohwilleke
    Feb 27, 2017 at 17:01

A 1997 Economic Study by the Congressional Economic Committee concluded:

"Macroeconomic Effects. Economist Allen Sinai maintains that a capital gains tax reduction would lower the cost of capital, boost investment, and stimulate economic growth. He estimates that a capital gains tax reduction could:

  • increase real gross domestic product (GDP) by an average of $51 billion annually;
  • create 500,000 new jobs by the year 2000; and
  • increase real business spending by an average of nearly $18 billion annually.

The effects of increased investment and economic growth would reverberate throughout the entire economy in the form of higher wages and rising living standards. In addition, the United States taxes capital gains more harshly than its major international competitors. Reducing the capital gains tax rate could increase U.S. global competitiveness.

Tax Fairness. The treatment of capital gains is generally unfair and strongly discourages saving and investment -- two activities crucial to economic growth.

  • Taxpayers must pay capital gains on illusory, inflation-generated gains. In years of high inflation, this means people may pay capital gains taxes on capital losses.
  • The effective capital gains tax rate often exceeds the statutory maximum due to various phase-out provisions in the tax code.
  • Saving is subject to three, and sometimes four, levels of taxation.

Reducing the capital gains tax rate would mitigate the problem of taxing inflationary gains and would help reduce the bias against saving and investment which prevails under the current tax code."

The inverse is also true. Increasing the cost of capital (i.e. investment into startups will now seek a much higher return). So now, the things that will get funded are primarily those that have the prospect to provide a capital return that's greater than 40%. There are a lot fewer of those businesses. The investment will flow to fewer founders who are "good bets" for high short-term returns. This will concentrate more wealth into fewer people and reduce investments into less-established or new founders.

In addition, we will see a lot more "locked-in" investors, who are not selling off in order to avoid the capital gains tax. This will make the economy more sluggish and it will favor large corporate incumbents, rather than nimble new startups. Innovation will slow down. This will make the economy less efficient. The economic decline of the US will be inevitable!


For corporate taxes, lower rates typically mean less spending and more hoarding of cash since that's penalized less. Higher corporate taxes actually encourage more capital expenditures, R&D and other forms of investment, since that's the best use of their capital as opposed to handing it over to the government.

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    Question is looking for hard data. Answer does not provide hard data. Feb 24, 2017 at 22:01

The rationale I have heard for this is that a lower tax on capital gains is supposed to encourage investment

that's basic economics 101: everything else being equal, if you lower the tax (on anything), you encourage its production.

and increase the economic growth.

there are two distinct types of "capital gains": one from folks starting a business, investing in a new product, building a factory, aka, activities that yield real impact.

then there is investments in the secondary markets, buying and selling of ownerships in factories or products that the first kind produces. this type of investments creates a valuable incentive for the investors in the first kind so they do have an important role, but typically at much diminished levels.

to make matters worse, there are those people who work to produce such gains for other people. their "capital gains" are more like salaries, as a form of compensation for their work, not their putting their own capital at risk.

Unfortunately, people blends both kinds together when they talk about capital gains and taxes on capital gains, making the matter fuzzier for the average joe to comprehend.

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