FEW policy choices bring the trade-off between efficiency and equality into sharper view than taxes on capital. On the one hand, capital taxes harm the economy by discouraging productive saving and investment; many economists argue that capital should not be taxed at all. On the other hand, capital owners tend to be rich—if you are struggling, you are unlikely to have much of a stock portfolio. Capital taxes, then, are progressive. Marco Rubio’s tax plan places him squarely in the efficiency camp—and at great cost to the federal budget.
Mr Rubio would eliminate all personal capital taxes, whether on interest, dividends or capital gains. This would encourage Americans to invest, in property, stocks, and by starting small businesses. In the long-run, that would be welcome. Americans typically do not save enough, and productivity growth could do with a fillip from investment. Capital taxes encourage jam today rather than jam tomorrow; choose to spend your earnings, and there is no tax to pay, but choose to invest them and the returns are taxed again before they can be cashed out. If you invest in a business, it typically must pay a levy...Continue reading