Will the Elimination of Capital Gains Taxes Lead to Economic Growth?

Today I read a blurb, where the author claimed that Ronald Reagan’s capital gains tax reduction led to the “explosion” of the technology sector.

This surprised me.  I am under the impression that capital gains taxes have been at their lowest in the past 30 or more years – and yet the economy hasn’t really exploded (unless you want to eliminate all industries but oil and defense).

In 1978 the capital gains tax rate was reduced to a max of 28%. In 1981 they were reduced to a max of 20%. in 1986 the max went back up to 28%. We had a recession in the early 1990s. By 1993, high-income taxpayers were paying more than 28%. The Dot-com boom gained momentum in the mid-90s. Short-term and long-term differentiation was added in 1997. The Dot-com bust happened in 1999-2001(?). The long-term rate was reduced to 15% in 2001. In 2006, that rate was continued (through 2010). Has the economy grown since 2001?  

I see a reverse relationship between the capital gains rate and the economy. What am I missing?

The Dot-com boom could be traced back to defense spending.  Reagan, and others before him can take credit for that. Yet, I don’t see a connection to lowered capital gains tax rates.  There were a multitude of factors that directly led to the Dot-com boom. Being able to simplify it to just one simple variable would be nice.  If it were that simple, then surely someone would try playing with that one variable, hoping for that get-rich-quick scenario for the US economy.  Oh, wait, some people have.

~ by mz on October 1, 2008.

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