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The Capital Gains Mandate: Jun. 1989

It's about global competition, not just budgets.

By From the June 1989 issue

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Editor's Note: Former Florida Gov. Jeb Bush is back in the news again as a possible “Establishment” candidate for the GOP presidential nomination in 2016. But there was a time when he considered perhaps more Reaganite than his father, who had just been elected president. Consider the two un-ghosted columns he wrote for us in 1989. The first (republished below) reveals him to be unabashedly Jack Kempian and supply-siderish, the second (to come next week) solidly anti-Sandinista and pro-democratic regarding Nicaragua. Among conservatives in those days, he and not his brother George was regarded as the young Bush to watch. Perhaps today’s right is being too quick to dismiss him?

No, it wasn't Willie Horton or the Pledge of Allegiance—the issue that took the prize for sheer demagoguery in last year's presidential campaign was, of all things, the capital gains tax rate. And the candidate who led the charge in misrepresenting what the issue was all about was Governor Michael Dukakis, who, with class-warfare rhetoric, argued that a cut in the tax would be a "$40 billion giveaway for all of Bush's rich friends."

Well, the election is a thing of memory now and President Bush, carrying out his campaign pledge, has called for lowering the tax bite on capital gains from a destructively high 33 percent rate to 15 percent. The outcome of the debate on this issue—with the administration on one side and the congressional Democratic leadership on the other—will help determine the question of whether the United States is really serious about being competitive in the global economy.

Check the record: on three occasions in the past ten years, Congress has changed the effective tax rate on capital gains. On two of those occasions, economic growth and opportunity were the winners.

In 1978, the Steiger Amendment helped stimulate free enterprise-driven high growth in areas like the Silicon Valley. Again, in 1981, a second supply-side cut brought the top marginal rate down to 20 percent on capital gains.

Thus, despite the sour-grape arguments of the Democratic opposition, it's clear that the economic activity of the early 1980s was enhanced by supply-side cuts. Close to 20 million jobs have been created since 1981. Let liberal opponents of the cuts argue against that.

Yet, even after the stunning success of these pro-growth tax rate cuts, the liberals in Congress actually argued against success by doing away with the capital gains differential in 1986. That year, in order to achieve a comprehensive tax package, the Reagan Administration acquiesced and the rate was in effect increased to as much as 33 percent. With what result?

Again, check the record: columnist Warren Brookes recently cited Treasury figures to demonstrate that since passage of the Steiger Amendment, increasing amounts in capital gains have been declared—and more taxes paid— even though the rates were lower. When the capital gains rate was increased, fewer gains were declared and the Treasury took in less revenue. Proving? That people obviously have less propensity to sell homes, stocks, businesses, or other assets if the tax on sales is too high. The result is reduced investment and economic activity.

The bottom line, it seems to me, is that all the energy currently being expended in expressing concern over leveraged buyouts could better be spent by creating incentives via the capital gains differential, in order to create equity rather than pile up debt.

Critics of the Bush Administration's tax cut initiative have attacked it on three fronts.

First, they cite the budget deficit—ignoring the economic fact that (contrary to their predictions) previous capital gains cuts have resulted in increased revenue. Indeed, according to Treasury Department estimates, the Bush capital gains cut would yield more than $5 billion in higher revenues by the end of 1990, while at the same time creating thousands of new jobs.

The critics' second argument is, once again, the old class-warfare appeal. Like candidate Dukakis, they charge that the cut would be "another giveaway for the rich." Fact: the most recent cut in capital gains resulted in the richest one percent of Americans paying a significantly higher share of the total tax burden.

No, the primary beneficiary of the Bush plan isn't "the rich" the liberal demagogues love to flog but entrepreneurs of all classes who are given incentive to risk their capital—and create jobs—by a capital gains tax differential.

Third, critics led by House Ways and Means Committee Chairman Rostenkowski are opposed to the capital gains tax reduction because it is too soon to tinker with so-called 1986 tax simplification legislation. In order to compete in a very competitive world, we need to stimulate savings and investment over consumption and debt. This objective outweighs the admirable objective of consistency in the tax code. And for simplicity, why do all the accountants I know walk around with constant smiles on their faces?

Reduction of the capital gains tax will also help accomplish a key Bush Administration priority: rebuilding our inner cities through enterprise zones. Such reduction, combined with the other aspects of zone legislation— property tax deferrals, sales and employment tax abatements—provides entrepreneurs incentives for investment, offering hope of bringing these areas into the nation's economic mainstream and helping disadvantaged members of minority groups realize the American dream.

The strong support of the President and Secretary of Housing and Urban Development Jack Kemp for enterprise zones stems from one simple fact— government programs alone cannot do the job. If there's any lesson we should have learned during the past thirty years, it is that only an active private sector can turn the South Bronx, East Los Angeles, and Miami's Overtown into economically viable areas.

In the final analysis, the capital gains issue is about more than just taxes and budgets. It's about competition. How can we expect to maintain our competitive position—much less pre-eminence—in the world marketplace if America's productive capacities are burdened at every turn? It's time we relearned the economic lessons of history. As we compete against Japan, which has a low capital gains tax, and West Germany and other European nations, which have no capital gains tax, let's not go into the fight with one hand tied behind our backs.

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About the Author

Jeb Bush is a former governor of Florida.