A new paper by UC Berkeley economist Danny Yagan provides further evidence that tax breaks that largely benefit the wealthy and profitable corporations are not a remedy for boosting the economy. In 2003, President George W. Bush passed one of the largest cuts ever to a federal capital tax rate – reducing the top tax rate on dividends to 15 percent from 38.6 percent. Using federal IRS data on corporate tax returns, Yagan compared corporations that benefited from this tax cut (C-corporations) to firms that didn’t benefit from the tax cut (S-corporations).
Corporations that got a massive dividend tax cut didn’t make any different choices about things that boost the real economy, the new paper highlights. The massive reduction to the federal dividend tax rate resulted in no meaningful change in corporate investment, net investment, or employee compensation for corporations. What did change following the huge dividend tax cut was an increase in payout to corporate shareholders. Simply put, the tax cut benefited corporate shareholders but not the overall economy.
Some lawmakers and outside groups in North Carolina are pushing to eliminate capital gains from state taxes. Governor McCrory recently announced his desire to eliminate the state’s capital gains tax for what he deems “innovation-related companies”. Either proposal to cut capital gains taxes would overwhelmingly benefit the wealthy at the expense of everyone else in the state, a recently released BTC report highlights. Proponents often claim that eliminating or reducing the capital gains tax rate will increase investment and help boost the economy. However, no apparent cause-and-effect relationship exists between changes in the top capital gains tax rate and savings, investment, or productivity growth. Instead, various analyses highlight how cutting capital gains tax rates have concentrated income at the very top. There is simply no reason to expect this reality to somehow be any different in North Carolina.
Bigger tax breaks for the rich while the state is cutting support for schools and other essential job-creation tools is not a path that promotes economic opportunity and prosperity for all North Carolinians. This new paper serves as yet more evidence that state lawmakers should reject calls to eliminate or cut capital gains taxes and instead work to make sure the wealthiest North Carolinians and profitable corporations pay their fair share.
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