4.26.00
Soak the Rich: Cut the Capital Gains Tax

4.12.00
How the Other Half Thinks

4.06.00
Taxing Fantasies

3.17.00
Speaker Shuster

2.16.00
Baseless Republicans

he evidence is now rolling in that the 1997 capital-gains cut was an unqualified success. The latest data from the Treasury Department further confirms that every claim made by the income-redistributionist critics was wrong. The tax cut did increase asset values. It did contribute to the largest gain in productivity and private-sector capital investment in a decade. It did not lose revenues for the federal Treasury; in fact, it has increased tax receipts by almost 100 percent in just three years — far more than even some of the most ardent supply-siders expected.

Larry Kudlow and I have made estimates on the capital-gains receipts for 1999 based on IRS tax-withholding data. We calculate that cap gains receipts exceeded $110 billion. In 1996 capital gains collected $62 billion in receipts. Let me state this again: We have almost doubled capital-gains tax receipts after the capital-gains cut just three years ago!

The capital gains tax is the one voluntary tax in the internal-revenue code. Asset owners can protect their wealth from the tax collector by simply refusing to sell their farm, family business, or stock holdings. A rate cut, however, impels the investor to "un-lock" accumulated gains and sell the asset — often to reinvest the money in even higher value-added assets. We now have the evidence to show that this was indisputably the case after the 1997 rate cut.

Seldom in economics does real life so conveniently confirm theory as this example confirms the famous Laffer Curve. Lower tax rates change people's economic behavior, stimulate economic growth, and thus often create more, not less, tax revenues.

In truth, this Laffer Curve reaction to the 1997 Archer-Roth capital gains cut wasn't at all hard to anticipate. History has proven time and again that there is no surer way to stimulate an economic expansion and to "soak the rich" than by cutting the capital gains tax. After the 1981 capital-gains cut from 28 to 20 percent, the cap-gains revenues leapt from $12.5 billion in 1980 to $18.5 billion by 1983 — a 48 percent increase. More importantly, slashing the income and capital gains tax rates in 1981 helped launch what we now appreciate as the greatest and longest period of wealth creation in world history. In 1981 the stock market was cratered at about 1,000, compared to 11,000 today.

The stock market has clearly benefited from the recent cap-gains cuts. A 1999 study by the American Council for Capital Formation and the DRI economic forecasting firm estimates that about 25 percent of the gain was inspired by the Archer-Roth tax cut. That conclusion makes theoretical sense. Lowering the capital-gains tax penalty increases the after-tax rate of return on capital assets and thus raises their value. Hence, thanks to the Archer-Roth tax cut of 1997, millions of middle-income Americans have seen their wealth rise by thousands of dollars.

To keep the market strong, a capital gains tax cut is the best tonic: The rate should be cut to 15 percent immediately.

The familiar mantra of the redistributionists that any capital gains tax cut is just for the rich is more than just wrong — it's insulting. More Americans than ever before own their own homes, own their own businesses, and own stocks. The share of Americans owning stock has doubled in just the last decade, and continues to rise.

We are transitioning into a nation of worker-owner-capitalists. To get the votes of these worker capitalists, the GOP must be the party of pro-shareholder policies like cap-gains cuts.

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