A cruel joke about politics: “It’s not that Mr. X lacks principles. It’s that he does not understand the principles he has.”
I keep thinking of this joke as I follow the debate over the supposed need for another round of cuts in capital gains taxes and other taxes on capital.
The original point of such tax cuts back in the 1970s was to incentivize companies to invest in capital equipment, thereby boosting labor productivity and national income.
Two years into the recovery, hiring is still painfully slow. The economy is producing as much as it was before the downturn, but with seven million fewer jobs. Since the recovery began, businesses’ spending on employees has grown 2 percent as equipment and software spending has swelled 26 percent, according to the Commerce Department. A capital rebound that sharp and a labor rebound that slow have been recorded only once before — after the 1982 recession.
With equipment prices dropping, and tax incentives to subsidize capital investments, these trends seem likely to continue.
“Firms are just responding to incentives,” said Dean Maki, chief United States economist at Barclays Capital. “And capital has gotten much cheaper relative to labor.”
By what argument will still further cuts in capital taxes possibly ameliorate this problem?