Wells Fargo Gallup Poll Ranks Current Tax Rates as the #1 Threat to Investment
The real question is what tax rates would help improve economic growth.
That question is hotly debated among economists and politicians alike. In an interview on CNN on May 17, 2015, Bill Gates, one of the richest people in the world, stated, “The highest economic growth decade was the 1960s. Income tax rates were 90 percent.” Mr. Gates added, “I mean, the idea that there's some direct connection that all these innovators are on strike because tax rates are at 35 percent on corporations, that's just such nonsense.”
The 1960s were actually a decade of tax cuts that originated with President Kennedy. His tax proposal included tax benefits and cuts for businesses and the wealthy, covering investment tax credits, improved depreciation allowances, lower capital gains tax rates, and a reduction of the top marginal tax rate charged to America's wealthiest people from 91% to 65% (Shmoop Editorial Team, 2008).
In a UC Berkeley study, Christina Romer and David Romer studied the macroeconomic effects of tax changes. They stated, “Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly three percent. The most striking finding of this exercise is that tax increases have a large negative effect on investment.”
A 2014 study by the Brookings Institution and Tax Policy detailed the effect of income tax changes on economic growth. The study stated, “The results suggest that not all tax changes will have the same impact on growth. Reforms that improve incentives, reduce existing subsidies, avoid windfall gains, and avoid deficit financing will have more auspicious effects on the long-term size of the economy, but may also create trade-offs between equity and efficiency.”
The Brookings study added, “We find that, while there is no doubt that tax policy can influence economic choices, it is by no means obvious, on an ex ante basis, that tax rate cuts will ultimately lead to a larger economy.”
Interestingly, the report observed, “While the rate cuts would raise the after-tax return to working, saving, and investing, they would also raise the after-tax income people receive from their current level of activities, which lessens their need to work, save, and invest.”
The Tax Foundation studied the corporate tax rate and whether a cut would significantly boost the economy. The study concluded, “A cut in the corporate tax rate would have large effects on GDP, but minimal effects on total federal revenue in the long run.” The Tax Foundation also concluded that “if the corporate income tax were eliminated, the size of the economy would grow by 6.1 percent in the long run.”
The Gallup poll was targeted directly at investors. The message it is trying to send is that higher overall tax rates do affect the amount of investment. It would seem the majority of investors believe that favorable tax rates will encourage work, savings, and investment.