The Dubious Case For Privileging Capital Gains

Paul Krugman
NYT blog

I’ve had several people ask for a followup on my piece about David Frum and capital gains taxes — namely, what is the case for special treatment, and the case against?

Well, Greg Anrig at the Century Foundation has a good summary. Let me leave the distributional issues on one side; even if we don’t care (or neglect for the moment) the fact that low capital gains taxes overwhelmingly benefit a tiny minority, and leave us having to raise more taxes from everyone else, there are still good arguments against this preferential treatment.

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.

(More here.)