As taxpayers labor over their 2012 tax returns, a recent report by the Washington-based Tax Foundation on the most- and least-productive ways to raise revenue makes for timely and provocative reading. Citing as its basis an OECD working paper on the “least worst” ways to raise revenue, the Tax Foundation presented its own 15 options in hierarchical form. It rated corporate income taxes as the most harmful to promoting long-term economic growth; raising tax rates on investment income such as capital gains and dividends placed second. (The OECD report, which makes for difficult reading, also ranks corporate taxes as No. 1, followed by personal income taxes. It does not specifically mention investment income.)
According to Tax Foundation “modeling” done before the fiscal cliff agreement, U.S. economic growth would fall by over 2 percent annually if the capital gains rate was raised from 15 percent to 20 percent (it was) and if dividend taxes were raised from 15 percent to 39.6 percent (they were raised to 20 percent).
Questions about the impact of who pays what to whom — the underlying dynamic of any tax system — are by nature controversial. Besides the inherent impossibility of knowing the savings and spending decisions of 315 million people in a $15.8 trillion economy, tax-related “findings” are invariably colored by self-interest and ideology. It should be noted that the Tax Foundation itself has a decidedly right-leaning political orientation.
Still, whether you agree with its opinions or not, it is always good to keep an open mind. And when it comes to taxes, an open checkbook.