Highs and Lows: No Evidence that Cutting Taxes on Investments Spurs Growth

Earlier this week, the Washington Post reported on the growing tech economy in the District. The article highlighted a few companies that have taken advantage of the DC’s competitive advantage in policy and problem solving and applied it to technology. The District should look for smart ways to incubate and grow these businesses, but cutting taxes on wealthy investors who look to profit from this sector isn’t one of them.

A proposal currently before the DC Council would slash the tax rate on profits made from technology investments to just three percent, the lowest income tax rate in the city. It is one percent lower than the tax rate paid by DC households who make between $10,000 and $40,000 annually. The three percent rate is also significantly lower than the rates in Maryland and Virginia.

Research shows that cutting taxes on so-called capital gains does not spur investment. In fact, a Center on Budget and Policy Priorities report shows that cutting taxes on capital gains does not increase economic growth. According to the Congressional Research Service, most economists have found that reductions in capital gains taxes have small and possibly even negative impacts on savings and investment.

What is clearer is the potential impact on District revenues. If a company like LivingSocial had an initial public offering, the revenue loss in lowering the capital gains rate to three percent could be substantial, according to the city’s Chief Financial Officer. That’s less money the District will have for schools, parks and other important city services.

By cutting tax rates for wealthy investors, the District is neither effectively growing the industry, nor using revenues for much needed District services. Instead of cutting capital gains taxes, the District should find effective ways to grow the industries that it wants to promote.

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