Tax incentives for savings and investment lead to economic growth

Tax incentives for savings and investment deserve strong support, especially as America battles back from the pandemic.

A higher tax rate on investment income hampers U.S. competitiveness and would eliminate gains made over the last few years.

Over the last two decades, the U.S. has slowly regained its place globally when it comes to competitive tax rates. Prior to 2003, the combine tax rates on investment income in the U.S. sat at 60%. This rate was more than 10% higher than the world average and trailed only France.

Some proposals in Congress would result in the U.S. losing this competitive edge. Now, as the country battles out of a recession, our businesses cannot afford to go back.

The economy benefits from lower investment income tax rates

A Small Business & Entrepreneurship Council analysis found that over the past century, there have been five instances of substantive cuts in the capital gains tax. In each case, the economy benefited from these reductions. In contrast, there have been two instances where an increase in the capital gains tax clearly had a negative impact on the economy:

  • The capital gains tax rate steadily rose from 25% to 49.1% over the period from 1968 to 1976, and over that time average annual real economic growth underperformed the post-World War II average (3.0% vs. 3.5%).
  • With the capital gains tax hike in 1987 came slower economic growth. From 1987 to 1996, real annual GDP growth again under-performed – averaging only 2.9% compared to the post-World War II average of 3.5%