A word on capital gains; dividend taxes

Glenn Hubbard

TEXT OF COMMENTARY

Kai Ryssdal: Boy, there's nothing like a good discussion about tax policy to get the political juices flowing, huh? All right ... I kid. But there is a debate over taxes happening this election cycle. Commentator and economist Glenn Hubbard has been listening. And he's noticed something interesting.


Glenn Hubbard: With all the bickering over tax policy between the two presidential campaigns, you might have missed an important area of relative agreement:

Keeping dividend and capital gains tax rates low.

In 2003, President Bush and the Congress agreed to reduce the tax rate on dividends from as much as 35 percent to 15 percent; the tax rate on capital gains was also reduced to 15 percent. Many economists say these changes in tax policy raised stock prices, and stimulated business investment. By reducing the bias against corporate-equity financing, these lower taxes reduced leverage by nonfinancial companies. Even with all the turmoil we're seeing in financial companies, nonfinancial corporate balance sheets are relatively healthy. And that's cushioned the entire sector.

Senator McCain has supported the 2003 tax change and wants to make it permanent. After some to-ing and fro-ing, Senator Obama has said he also supports a low tax rate on dividends and capital gains. His economic advisors cleared up his position in The Wall Street Journal when they wrote that Obama now supports a 20 percent rate. Raising taxes on dividends and capital gains to this level would adversely affect investment and stock prices. But it's still low by historical standards. It's also a lot less than the tax rate the candidate proposes on the incomes of successful small business owners.

This relative convergence -- assuming Senator Obama's position does not shift again -- is welcome. A recent important economic study by economists Raj Chetty and Emmanuel Saez shows that the efficiency cost to the U.S. economy of raising dividend taxes roughly cancels out the amount of revenue raised!

Our federal government needs to restrain spending to keep taxes low. And among taxes, keeping tax rates on dividends and capital gains -- returns to saving and risk-taking -- low is in our long-term economic interest. That a conservative Republican and liberal Democratic presidential candidate are close to agreeing should be news.

Ryssdal: Glenn Hubbard is the dean of the business school at Columbia University. He used to run the Council of Economic Advisers for President Bush.

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