Why are capital gains taxed at 15%?

Kevin Drum explains:

So it's a good time to get a little wonky and ask why capital gains and carried interest are taxed at only 15 percent, while ordinary labor income is taxed at rates as high as 35 percent. If you're the cynical sort, you think the answer is simple: Rich people make lots of their money via capital gains and carried interest, and the Republican Party is dedicated to making the lives of rich people easy and prosperous. So they've made sure those tax rates are low.

Maybe so. But there's an official, noncynical answer too: Capital gains are profits from investments, and a high level of investment is good for the economy. Low tax rates on capital gains encourage investment and therefore benefit the entire economy.

But is this true? If it were, you'd expect to see some kind of long-term correlation between capital gains rates and the total amount of capital gains income. The lower the rates, the more the income. Let's roll the tape:

Do you see a correlation? I don't. What you see is two things. First, when people know rates are about to go up, they sell their assets quickly to beat the tax man and take advantage of the current rates. You can see that in 1968 and 1986. Second, capital gains skyrocket during investment booms. You can see that during the dot-com bubble of the late '90s and the housing bubble of the aughts. When you remove those artifacts, there's pretty much nothing left. No matter what the tax rate is, the level of capital gains pokes along at about the same rate. The same thing is true if you lag the results by five years, and you can see a similar result here, in a chart that compares capital gains rates to total investment levels in the US economy. There's simply no correlation. All taxes have deadweight costs, and it's likely that capital gains taxes have some impact on the economy, but all the evidence, both in the US and internationally, suggests that it's pretty modest. As the Congressional Research Service concluded in a study a couple of years ago, capital gains tax cuts "are unlikely to have much effect on the long-term level of output or the path to the long-run level of output (i.e., economic growth)."

To summarize:

Reason 1: Rich people make the rules, and they'd prefer to pay less in taxes

Reason 2: There is no *real* Reason 2

I know, I know, ideally we'd all pay less in taxes. Ideally I'd have a Unicorn too. Its just that we have to pay *some* level of taxes to support our economy - and it turns out that there is no theoretical basis for low capital gains taxes...