This figure shows the curvilinear relationship between economic growth from 1968 to 2010 and the capital gains tax rate. Each point in the scatter plot shows the growth rate for one year with the capital gains rate from 5 years earlier. For example the highest point on the chart show that GDP grew 7.2% in 1984 and that the capital gains rate 5 years earlier in 1979 was 28%.
The best fit curved red line in the scatter plot is used to make the model in the time series plot on the right. The data suggests that a capital gains tax rate of about 29.1% would maximize the growth rate and if the tax rate is above or below that level that growth will be weaker 5 years later.
The weakest growth on the chart, 2009, corresponds with a below optimal 15% capital gains tax rate. The next weakest year, 1982, was influenced by an above optimal 39.9% tax rate.
The influence of the capital gains tax rate on growth is combined with the effect of the top tax rate in Figure G5 to make a model that estimates growth in Figure G7.
theeconomyandtaxpolicy 