Have you ever ordered something that promised to clean your home in ten minutes? Or help you lose weight without exercising or changing your diet?
It was too good to be true, right?
The same thing can be said of Mayor Gray’s effort to pump up DC’s tech sector by giving huge tax breaks to people who invest in these companies. The effort to diversify DC’s economy, take advantage of DC’s highly educated labor force, and reduce our reliance on federal jobs is laudable, but it’s not the right way to deploy our precious tax dollars.
Trying to get there by cutting tax rates dramatically for tech investors is like taking the infomercial approach. It sounds great, but in the end it’s unlikely to work. Given that the tax cuts would cost the District a lot of revenue ‘ and turn DC’s tax system upside down by letting wealthy investors pay lower tax rates than any DC resident with a job ‘ this is not a risk worth taking.
How do we know? The federal tax rate on investments has fluctuated a lot over the last six decades, giving economists a rich set of data to analyze. And here is what they have found:
- “Cutting capital gains taxes will not turbocharge the economy…” That’s from Len Burman, Syracuse University tax professor and former director of the Urban-Brookings Tax Policy Center (TPC).
- “[T]here is no evidence that links aggregate economic performance to capital gains tax rates,” according to University of Michigan tax economist Joel Slemrod.
- A federal capital gains tax cuts adopted in 2003 “was a dud when it came to boosting the stock market,” according to a Wall Street Journal summary of a Federal Reserve study.
If cutting the tax on investment income has no effect for the nation as a whole, there is no reason to think a steep tax cut for tech investors in DC would make a difference, either.
Investment decisions are driven by whether an investment looks like it will pay off, not the tax rate the investor will ultimately pay. A guest columnist wrote in The Wall Street Journal this year: “[T]ax credits won’t make angels invest in a company that they wouldn’t invest in without the credit”¦. most [investors] aren’t so foolish as to throw their money away because someone waves an incentive in front of them.”
Efforts to boost DC’s tech sector will not come from a miracle fix but instead from doing the hard work to make DC an attractive place for companies to flourish. Just today, the Washington Post pointed out that manufacturer Siemens chose to build a plant in North Carolina ‘ rather than overseas ‘ because of the area’s great transportation infrastructure and effective public education system. Here in DC, Mayor Gray’s continued focus on school reform and aggressive workforce development efforts ‘ including creating a new intermediary to connect job trainers with employers ‘ are the kinds of things the city should be doing to strengthen our business climate.
If you believe that smart public investments is a better approach than tax cuts for tech millionaires, join us in telling that to the Mayor and DC Council.