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Why treat capital gains differently when the world is awash in capital?

November 15, 2021, 10:37 AM UTC

Good morning.

When I started my journalistic career four decades ago, there was a lot of talk about the need to encourage “capital formation” to drive investment, productivity and economic growth. That was the rationale for cutting the capital-gains tax rate—and has remained the rationale for treating capital gains differently than ordinary income to this day.

But new data from the McKinsey Global Institute could cause analysts to think twice about that broad-brush approach. The MGI number crunchers created a global balance sheet for 10 big countries—Australia, Canada, China, France, Germany, Japan, Mexico, Sweden, U.K. and U.S. And what they found is a world awash in capital. By their account, wealth has tripled since the beginning of the century, grown 50% faster than GDP, and—at six times GDP—reached levels never experienced before.

Where is all that wealth being invested? It turns out two-thirds rests in real estate. Meanwhile, the assets that “drive economic growth”—infrastructure, industrial structures, machinery and equipment, intangibles, as well as inventories and mineral reserves—make up less than a third. For all the talk of a digital economy, “intangible” assets—like software and intellectual property—account for only 4% of the global balance sheet.

What does that mean for the global economy? If the trend continues, and wealth keeps rising faster than GDP, it could lead to ever greater inequality in wealth. Or, in an alternative scenario, inflated wealth could be a sign that a correction in asset prices is coming, as the world returns to the norm. In either case, it seems clear that policy should focus less on undifferentiated “capital formation,” and more on investments that drive economic growth.  

It’s not light reading, but you can find the full report here. More news below.

Alan Murray
@alansmurray

alan.murray@fortune.com

Clarification: This essay was updated on Nov. 15 to note that wealth has grown 50% faster than GDP, rather than six times as fast.

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AROUND THE WATER COOLER

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This edition of CEO Daily was edited by David Meyer.

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