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October
12, 2001, 8:00 a.m. |
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To:
The Honorable Richard Armey,
House Majority Leader
From: Rep.
Richard Baker Chairman,
House Subcommittee on Capital Markets
Subject: Will
the economic stimulus plan
include our strongest weapon?
he
evidence of the terrorists’ “success” in devastating Americans was brutally
clear the moment the attacks transpired, and immediately forged consensus
that our course was clear:
War had been waged against us, and no amount of increased home security alone would be sufficient to stop future attacks by such cold-bloodedly calculating and determined enemies. We had to take the fight to the terrorists, to seek and destroy their networks wherever they reside, and render them incapable of any future atrocities against our fellow Americans.
Evidence of the terrorists’ “success” in disrupting America’s economy, clearly a co-target of their attacks, has been slower to accumulate, but is now no less clear and no less demanding our resolve for swift and bold action to counteract further economic pain for the American people.
Congress has rightly discussed an “economic stimulus package,” taking expert counsel from Federal Reserve Chairman Alan Greenspan and former Clinton Treasury Secretary Robert Rubin. Nobody has a higher regard than I do for Mr. Greenspan and Mr. Rubin. However, I have misgivings about their messages of restraint being fully representative of the majority of concerns being voiced across America, from Main Street to Wall Street and back again.
We received the additional information Mr. Greenspan advised us to wait for before taking action. The markets have lost $1 trillion in worth since Sept. 11; jobless claims were reported last week at decade-long highs; new GDP estimates indicate an almost certain period of recession. Likewise, the focus on the bond market and long-term interest rates in Mr. Rubin’s model, whereby deficit reduction leads to economic growth, has been challenged by events leading back to the start of 2000, when our slide toward recession commenced simultaneous with the height of federal budget surpluses. Clearly other weaknesses have been at play here.
Last week the president called for “aggressive action” with a stimulus package in the range of $75 billion. The markets rallied on the announcement itself, even while the details will take some weeks to iron out. However, if in the name of bipartisan cooperation these discussions to date have included the advice of Mr. Greenspan and Mr. Rubin, I have personally found it difficult to believe that, for the sake of “equal time,” they have not also included a voice advocating an aggressive Reaganesque, pro-growth agenda.
I would point out that a number of other economists and policymakers also played a key role in a 17-year period of growth that is unparalleled in American history, and their voices should also be heard. As it appears there will be more discussions, I strongly urge you to recommend the presence of at least one of any number of such individuals. The list, in my opinion, might include former Rep. Jack Kemp, economists Lawrence Kudlow and Arthur Laffer, Wall Street Journal editor Robert Bartley, former Fed chairman Paul Volcker, and even economist-policymaker Sen. Phil Gramm.
Last week you asked colleagues to consider four pro-growth principles to guide an economic stimulus package. While tax policy is not my usual legislative field of expertise, I believe I have a unique perspective on what might best be done now to aid our ailing capital markets, and I offer the following specific suggestions as a follow-up to the principles you outlined:
• Reduce taxation rates on capital gains.• Call for immediate conference action on legislation passed overwhelmingly earlier this year by both the House and Senate to address hidden over-taxation of SEC fees, saving investors over $14 billion in the next decade by reducing the fees they pay every time they trade stocks.
• Pass bipartisan legislation establishing legal certainty over counter-party failure in derivatives contracts, by allowing for the netting or offsetting of claims outside of bankruptcy proceedings involving one or more of the counter-parties.
Right now the single greatest threat to our economy is the continually squeezed level of investment capital that fuels job creation, business expansion, and technological advancement. The latter two of my proposals are simple tools we already have at our disposal to increase efficiency of capital flow at a time when the markets need it most.
For the sake of bipartisan economic action, it was reasonable to accommodate certain spending provisions, which constituted defensive measures taken against losses associated with Sept. 11. But here’s another truly “defensive” measure. If House Republicans need to prove a commitment to lower income taxpayers, then it should first and foremost cover our men and women in uniform putting their lives on the line for their fellow Americans. So why not a means-tested, total elimination of federal income taxes on armed services personnel serving on combat-zone and non-combat-zone active duty?
But now is also the time to review every known method to stimulate economic growth and not just concentrate on how to respond to losses. Some offensive-minded proposals include speeding up and making permanent the tax cuts enacted earlier this year, reducing corporate tax rates, and accelerating depreciation or expensing of business capital investments.
However, I believe the first proposal — cutting capital-gains tax rates — is quite simply the strongest, quickest, and most accurate arrow in the government’s economic-stimulus quiver. To leave it unused would be akin to mounting a military offensive of troop advancements while leaving on the ground an initial swift and powerful air campaign to fortify their movements.
Capital-gains tax cuts have historically provided the economy the biggest bang for the buck primarily because they are the most broadly based, with benefits simultaneously impacting individuals, corporations, and the capital markets. In fact, individuals gain in the short- and long-terms, with immediate incentives for greater returns on investor risk-taking, and longer-range potential prosperity for investors from a stronger market as well as for non-investors through job creation that accompanies a growing economy.
The usual argument that capital-gains tax cuts are “only for the rich” ignores the populist reality emerging from a paradigm shift in investor demographics: market participation by some 100 million investors, or 52% of American households, with an average annual income of $50,000 or average household assets of $60,000. A new argument — an unintended market sell-off — can be met with purely investment incentive, by reducing rates only on those made after Sept. 11.
I agree with GOP Sen. Gramm and Democratic Sen. Zell Miller, who when they introduced legislation for capital-gains reduction last week agreed it should stand alongside several other mutually agreed-upon provisions. But more importantly, they said, it enjoys far greater bipartisan support than many realize, provided it has a chance to be voted on.
It seems to me that now is precisely the time for this sizable number of like-minded legislators to come forward and voice their support for an economic plan that recognizes that “the best defense is a good offense.” Let me pledge to you whatever assistance you might need to marshal our message forward.
— Rep.
Baker is chairman of the House Subcommittee on Capital Markets, Insurance,
and Government-Sponsored Enterprises