Slate’s Matthew Yglesias is on the same track as Matthews here, writing that “Mitt Romney’s effective tax rate is very low. Most economists think it should be.”
Even researchers like Thomas Piketty and Emmanuel Saez (see “A Theory of Optimal Capital Taxation”) who dissent from the standard no taxation of investment income position think capital income should be taxed more lightly than labor income.
I’d note that in that report, Piketty and Saez write that an optimal capital tax rate would be between 50 percent and 60 percent. Moreover, there’s an increasing amount of dissent amongst economists, if you take the word of The Economist, which is nobody’s idea of a left-wing rag:
But some economists are questioning the prevailing view, not least because reductions in capital-tax rates appear to have delivered more inequality than growth…
That is because the growth costs of capital taxes are overestimated. The old models contend that capital supply is highly sensitive to changes in tax policy, and that a zero tax rate is needed to prevent capital from drying up over the long run. This looks unrealistic, the authors reckon. Most capital-income taxes are paid by working-age adults saving for retirement, who will continue to save despite taxes. Stubborn savers make for a stable supply of investment capital, limiting the impact of taxes on growth. In the authors’ estimation, a 36% capital-income tax rate is justified.
And just how solid is that economic consensus about low capital taxes? I’d say it’s at least worth noting that Paul Krugman, the leading liberal economist, says that capital shouldn’t be privileged over other income (emphasis mine):
So, the case for low rates on capital gains is that by taxing investment income as ordinary income, we effectively discourage saving: if you spend your income now, you pay taxes only once, while if you invest for the future, you pay taxes twice, so eat, drink, and be merry.
There is, however, no evidence that this effect is at all important.
Meanwhile, by taxing income at very different rates depending on how it manifests itself, we create huge incentives to manipulate income to make it come out in the favored form. And this has real economic costs.
Mark Thoma agrees with Krugman. So does Jared Bernstein. So does Dean Baker, who writes, “It is most definitely not the case that economists agree that Mitt Romney should be paying his current 14.1 percent tax rate or less as Washington Post readers were told by Dylan Matthews today.” Uwe E. Reinhart is on board, as is Tax Policy Center (for capital gains), the Congressional Research Service, etc. etc.
Nocera concludes that “The idea that a lower capital gains rate spurs economic growth is one of the enduring myths of conservative thought.”
It’s an enduring myth in liberal thought too—at least in some circles.
— Further Reading:
Wealth Over Work. The Washington Post excels; Indiviglio misses the point.