- Widely accepted economic theory states that lower (or zero) taxation on investment income incents aadditional investment by people who would otherwise not bother investing it (see his example of two doctors deciding what to do with the money they make being doctors)
- It's really a great theory but there's no clear proof of it in the data
That's the theory, at any rate. It's a pretty solid theory, it's in most of the textbooks I've seen, and it shapes public policy in basically every country I'm familiar with. Even researchers like Thomas Piketty and Emmanuel Saez (see "A Theory of Optimal Capital Taxation") who dissent from the standard no taxation of investment income position think capital income should be taxed more lightly than labor income. Empirically, it's a bit difficult to verify that variations in capital gains tax rates and the like really are making a material difference to investment levels. But then again the data is noisy.I can't help but snark here and express my utter surprise that the empirical evidence for the benefits of trickle down economics is thin. I could stop right here as I think that alone disqualifies the piece from having achieved its aim, but there's a couple other things to say:
- Yglesias contends the doctor who invests his money is being "double taxed" on the money when he has to pay normal income tax rates on the gains he makes. His commenters take suitable exception to this, even if investment income is taxed like regular, when you sell your $1M in stock, you only pay taxes on the gains not the amount you originally invested.
- It's bizarre to use an example of two upper-middle class professionals to justify the tax rates that Mitt Romney pays. Romney is in the stratosphere of wealth, he can consume as much luxury goods as he can possible use or want and not have to make hard choices about whether to invest money. Maybe it could marginally affect how much he invests or spends but Yglesias' example has the prodigal doctor who spends all his money on luxury vacations and such and invests none of it.
Even if Yglesias could prove some increase in investment because of lower tax rates, and further prove that additional investment leads to broad societal gains (something he doesn't attempt) - in a utilitarian argument you still have to show the gains are worth the costs. I strongly doubt letting the rich keep all unearned income tax free (or significantly discounted) could survive that test.
Finally, as several commenters point out, there's no reason that investment income cannot also be taxed progressively even if the rates are lower than labour income. Maybe the doctor should pay 15% on his modest capital gains, but why can't Romney pay 25% or 28% on the millions he makes instead of 15%? Even making the case for lower taxes on investment income in principle is not to defend America's crazy ultra low 15% rate on all capital gains.