Capital Gains Tax Rates and Savings | The Baseline Scenario

By James Kwak

Earlier this week, I ?wrote my own ?job creator?s? manifesto for?The Atlantic, in response to Steven Pearlstein?s great parody. You can read it if you are interested in knowing what one ?job creator? thinks our country needs.

There?s something I forgot to add, however. (Literally: while I was away from my computer I decided to add it, but then I forgot to do so before sending it to my editor.) As I?ve said before, the capital gains tax rate had no impact on my decision to start a company. It couldn?t have had any impact, because I didn?t know what it was.

In addition, the capital gains tax rate has no impact on the question of what I do with my money. My wife and I both have jobs, and we live in an area with a moderate cost of living, so we can basically fund our lifestyle out of current wage income. Everything else gets invested according to a few simple, fundamental principles?basically an approximative version of mean-variance optimization.

I don?t think, ?The capital gains tax rate is going up next year, so I should sell a bunch of assets and increase consumption today.? I don?t need another car (I just replaced my thirteen-year-old Prizm with a Subaru Impreza), and there aren?t many expensive restaurants where we live, and with two small children we?re not about to go on an eco-safari in Africa. Barack Obama and Mitt Romney could jointly announce that they are eliminating all tax preferences for investment income, and it wouldn?t change my savings and investment decisions a bit.

Now, changes in investment income tax rates can affect the relative valuations of different types of investments, such as high-dividend vs. low-dividend stocks. But the point here is that if your consumption decisions don?t change, then the amount of capital you are making available for investment in the current period remains the same. There may be more sophisticated people out there who may buy more LVMH products when capital gains tax rates go up. I?m just not one of them.

Source: http://baselinescenario.com/2012/10/05/capital-gains-tax-rates-and-savings/

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