Would Higher Taxes for the Top 1% Really Stymie Investment?

By Miranda Marquit

September 9th, 2008

Posted in Investing Trends, Investing News, Investment Portfolio

One of the assertions made by many right now is that lower taxes result in more investment. Indeed, Obama’s most vocal critics against his plan to force the Bush tax cuts expire ahead of time (or expire at all), including a resultingly higher capital gains tax, say that if taxes go up, investment will go down. But is this true? Will upping the capital gains and letting Bush tax cuts expire for the top 1% really stymie investment?

The Bush tax cuts and investment

When the Bush tax cuts were made back in 2001, the claim was that it would spur investment and help the economy (you know, by trickling down). But, as BloggingStocks points out, it didn’t work out that way:

The tax cut didn’t work: saving and investment have been “anemic” during the Bush years, Baum said, citing data provided by Paul Kasriel, chief economist at Northern Trust Corp. in Chicago. Business investment is down, the savings rate is at a post-World War II low.

Additionally, the Reaganomics approach to the tax cuts didn’t take into account the fact that the rich who got this tax cut could take their savings and invest them in places other than the U.S. economy. Which they did.

Additional tax cuts — and leaving the current cuts in place

There is no reason to think that keeping the tax cuts in place will spur more investment — nor is there evidence to think that more tax cuts will help investment pick up. Quite the opposite, reports Presidential Nominations:

However, there are worries that the higher deficits that are expected because of the tax cuts could drive up interest rates, raising the cost of money for businesses and result in less investment, not more.

More tax cuts (as McCain proposes for the wealthy) could actually cause less investment, rather than more investment. Another consideration, if you are concerned about the deficit. The Tax Policy Center estimates that McCain’s tax policies would result in a deficit that is $1 trillion greater than what would occur under Obama (although in both cases, there will be an increase to the national debt.)

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.