Opinion Columns & Blogs

Amity Shlaes: Create jobs by cutting capital-gains taxes

Along with jobs, raising taxes on the rich is one of the things the Wall Street protesters feel strongly about, as Andrew Cuomo, the Democratic governor of New York, is learning all too well.

Cuomo has become a target for activists because he's refusing to fight to extend a state-tax surcharge on the wealthy that expires soon.

But Cuomo's insistence is born of experience. Higher taxes can destroy jobs. As data from the Tax Foundation shows, New Yorkers are net migrants to Connecticut. Both Cuomo and various jubilant governors in Connecticut have attributed the shift to taxes.

Weightier studies surveying the treatment of capital nationally suggest that sparing the rich from paying taxes creates jobs. This is especially true for the capital-gains tax.

Evidence for this began to accumulate in the 1970s and '80s, when Wall Street forecaster Allen Sinai was assembling models to simulate the effect of public policy changes for Data Resources and Lehman Brothers.

Sinai moved on and developed succeeding mega-models, the most recent being the Sinai-Boston macroeconomic simulation program. Early on, Sinai and his colleagues noticed that changes in the capital-gains tax rate affect economic growth. And for decades, Sinai has been analyzing rate changes to forecast for Democrats and Republicans alike. He told me that his overall conclusion is: "Lower capital-gains taxes help to grow the economy at relatively low cost to the deficit and debt."

The American Council for Capital Formation, a Washington, D.C., group that lobbies for lower taxes on investments, asked Sinai to model how the economy might perform if the current capital-gains levy of 15 percent were changed. He estimated how fast the economy would grow over five years, using rates ranging from zero to 50 percent, relative to probable growth under the current law.

The study was published in 2010, and Sinai says he stands by it. The results are dramatic. Right now, economists say the economy needs to create about 2.4 million jobs a year. Sinai found that eliminating the capital-gains tax alone, with no other policy change, would create 1.3 million a year, or more than half the total sought. Real gross domestic product would increase by 0.23 percentage point a year. The jobless rate would drop by as much as 0.7 percentage point in a year.

This change would bring the United States much closer to the growth levels to which we were once accustomed. And it wouldn't damage the budget nearly as much as simply calculating the amount of foregone revenue would suggest. That's because the growth created would generate other kinds of tax revenue.

The idea of a zero percent levy might sound absurd to ears ringing with Wall Street protest, but the idea has been around for a while, and has gained support in a number of places. Former Federal Reserve Chairman Alan Greenspan has often spoken out for it. Numerous other countries have experimented with a zero percent capital-gains rate over the years. Hong Kong officials swear by it.

What about the fairness the protesters chant for? Sinai says he favors raising taxes on one kind of capital gain, carried interest, to treat it as ordinary income. But the bigger picture is that lower taxes on capital are good for workers, a group that includes protesters and their siblings.

They will have to decide whether they care more about punishing the rich or about increasing the number of jobs available to their friends. It's a tough call. My guess is that as the temperature drops, the protesters will take jobs over rage.