No correlation between cap. gains tax and investment

Sometimes common sense is not so common... or correct.  Quantitative research, i.e. reality, often contradicts our intuitive sense of they way things ought to work, but actually don't.  Such is the case with capital gains tax rates, real investment and economic growth, as proven by tax law professor Chris Sanchirico of the University of Pennsylvania and Wharton in a recent paper [emphasis mine]: 

On the surface, the growth argument against capital income taxes seems clear and compelling. And many policymakers and pundits—on both sides of the aisle—appear to regard it as common sense. 

A very different picture emerges, however, from the academic research on taxes and growth. Scholarly evidence on the growth argument against capital income taxation is mixed at best. Indeed, it would not be unreasonable to conclude, based on the best available theory and data, that the growth argument has no real basis.

[...]  Compelling intuitions tend to melt away on close inspection, and the data tell no consistent story. When the negative growth effects of offsetting increases in labor income taxes or government borrowing are also taken into account, uncertainty begins to shade into doubt. Attempting to spur economic growth with tax preferences for capital income may be like trying to repair one side of the roof with shingles from the other. 

Regarding the non-correlation between capital gains and real investment, here's an historical illustration by economist Jared Bernstein:

If it seems to your untrained eye that there is no relationship between the red and blue lines, your eye is correct.  

And if you care about growing income inequality in the U.S. -- most conservatives don't -- then you must note the conclusion of Thomas Hungerford of the Congressional Research Service: "The reason income inequality has been increasing has been the rising income going to the top one percent.  Most of that has come in capital gains and dividends."

'Inconclusive' link between public debt, interest rates

Empirical data refutes the conservative mantra that higher government debt always leads to higher interest rates, thereby "crowding out" private investment:  

In a paper published by the National Bureau of Economic Research in April 2005, Columbia University economist R. Glenn Hubbard and Federal Reserve economist Eric Engen declared as “inconclusive” the link between government debt and interest rates. Hubbard headed George W. Bush’s White House Council of Economic Advisers from 2001 to 2003.

“While analysis of the effects of government debt on interest rates has been ongoing for more than two decades, there is little empirical consensus about the magnitude of the effect, and the difference in views held on this issue can be quite stark,” they wrote.

In fact just the opposite can happen:

“Deficits as a share of the U.S. economy have risen sharply at times with little to no discernible impact on the level of U.S. interest rates. In fact, just a cursory look at periods when the U.S. ran large deficits as a share of (the total economy) – 1983, 1991-92, 2008-2012 – we actually saw declines in nominal long-term (lending) rates,” said [Scott] Anderson [chief economist for Bank of the West in San Francisco].

He noted that the yield, or return on investment for bondholders, has not and did not rise sharply. “So the link between high levels of government spending and borrowing does not appear to raise the cost of money during these periods and therefore would not crowd out private consumption and investment,” Anderson said.

Just to show how fair & balanced I am, here's a recent WSJ op-ed that warns against a "fiscal dominance" scenario in the U.S., where debt-to-GDP consistently exceeds 80 percent, interest rates shoot up, debt increases even more, interest rates shoot up even higher, and a "fiscal death spiral" ensues.  Theoretically this is possible, but since this scenario depends a lot on "investor confidence," that means everything is relative.  Take Japan for example. Its debt-to-GDP ratio has been over 150 percent for years. It's now 225 percent. Yet Japan's borrowing costs remain low because of real deflation and the relative strength of the Japanese yen.  

Is government spending ‘crowding out’ private sector? No

By Kevin G. Hall

March 20, 2013 | McClatchy Newspapers

URL: http://www.mcclatchydc.com/2013/03/20/186450/is-government-spending-crowding.html