A bit inaccurate, don’t you think?

From Andrew Sullivan’s Daily Dish:

I know there are people on the Democratic side who understand this. They know that those on the left in Europe figured out in the 1960s that the price of a welfare state is a broad-based tax on consumption. Those on the left in this country haven’t figured this out yet so they will probably make a lot of mistakes when they move to raise taxes. If the left tries to do something really stupid like jacking up the capital gains rate, the economy will tank.

This isn’t exactly true.  As the Congressional Budget Office details:

Capital gains taxes may influence the level of output not only through their effects on the accumulation of capital but also through the way that capital is allocated among various uses. By shifting capital from lower-value to higher-value activities, a change in capital gains taxes may increase the overall efficiency of the economy by increasing the return from capital that is placed in service. In particular, treating capital gains favorably can reduce the inefficiency caused by the double taxation (under both the corporate income tax and the individual income tax) of corporate profits. And innovation and entrepreneurship may also respond positively to lower capital gains tax rates.

Eliminating the lock-in effect on the allocation of capital is often cited as a potential economic benefit from reducing capital gains rates. However, that effect is not about actual capital being locked in to particular uses but about asset holders being locked in to their ownership of existing capital. Moreover, the lock-in effect is unlikely to influence relative returns on different investments or to impede the movement of capital to new or promising growth firms because a large portion of capital gains–such as those earned by pension funds–are tax-exempt. Consequently, while lock-in makes it both more difficult and costly for individual asset holders to diversify their portfolios, its effect on the allocation of capital is likely to be minimal.

The favorable efficiency effects derived from lowering capital gains tax rates may be offset by the inefficiency generated by increasing the wedge between the tax treatment of capital gains and other income from capital. The differential between those tax rates can channel economic activity into endeavors that lend themselves to accruing gains: they distort a firm’s choice, for instance, between reinvesting earnings internally (to provide capital gains) and paying dividends that stockholders might reinvest more productively elsewhere. Indeed, the favorable treatment of capital gains plays a role in many tax shelters that misallocate investment. It is difficult to determine the net impact on the allocation of existing capital that might be produced by these second-order efficiency effects from changing the treatment of gains.

Or in an easier verbiage, though there is a general consensus that reducing rates on capital gains will have beneficial effects on the economy, it’s uncertain whether those benefits are substantial and there is evidence to suggest that any gains in efficiency may be offset by increased inefficiency elsewhere.

With that in mind, even if there were a decrease in economic output following a raise in capital gains rates,I don’t see what the big deal is, as long as there is some tangible benefit for the population at large.  Much better writers than I have tackled this, but I do think there is something seriously wrong with the fact that questions of economic growth undergird every aspect of policy discussion in this country.  Or rather, everything has to be justified in terms of economic growth, as if the central goal of our country is increase growth (in some abstract sense) and not better the lot of the nation as a whole.  Granted, these two things aren’t mutually exclusive, but occasionally we do have to make a choice about doing the smart thing economically, and doing the right thing morally.

My contention is that sometimes it’s okay to do the right thing, that every policy doesn’t need to increase growth to be worth while.  One of the criticisms thrown at advocates of nationalized or universal health care is that it will produce a drag on the economy and may reduce growth.  Now, throwing aside the dubiousness of those claims, so what?  In my eyes, I’d rather live in a country where everyone has adequate health insurance, as opposed to a country that has a marginally higher growth rate. 

The French have mandatory paid vacation time, nationalized health care, and an excellent child care system.  Yes, their growth rates are not as high as ours are, but their priority is quality of life rather than growth.  Americans work more and vacation less than their peers in other industrialized democracies.  We have worse health outcomes and are generally less satisfied than our peers.  I’m certainly willing to sacrifice a few thousand dollars of income or a few points of our GDP in order to live in a country that values quality of life more than growth.