Although capital income taxes penalize saving and slow long-run growth, the federal tax system imposes multiple such taxes. Seven increases in capital income taxes took effect at the beginning of 2013, and President Obama’s 2014 budget plan proposes further increases. In upcoming decades, rising revenue needs fueled by entitlement growth will create pressure to further expand capital income taxation despite its negative economic effects. Opponents of capital income taxation must reframe the policy debate by explaining the economic disadvantages of capital income taxes and proposing alternative budgetary measures that maintain tax fairness.
The appropriate tax treatment of capital income, or the income earned on savings, has been a major source of political controversy in recent years. Unfortunately, the political debate has often ignored or downplayed the economic effects of this type of taxation. To properly evaluate capital income taxes, we must understand how they affect saving and economic growth.