Politics & Policy

The GOP’s Pro-Investor Lifeline

The stock-market will matter the most to Republicans this November.

It’s not front-page corporate scandals that will sink the Republicans in this year’s midterm elections. Their problem is not, as Al Gore believes, a new generation of special interests and power brokers who are trying to take advantage of the American people. If the Republican party suffers this fall, the unexpected stock-market plunge will be why.

#ad#For many decades, voters have associated the Republican party with big business. Today, it’s just as popular — or unpopular — as it always has been. About 35% of voters approve of big business, and 65% approve of small business. Nothing has changed on this front.

What has changed, however, is that the majority of voters today link Republicans with the stock market. And they want to know why their 401(k)s have turned into 201(k)s. This will be the pivotal issue in the fall.

With that in mind, if the GOP cannot reach out to investors with a series of new tax incentives that can revive the lowly animal spirits of the stock market in particular, and business in general, it’s going to be a rough November for the Right.

So far, the debates over speeding up the Bush income-tax cut of 2001 and reducing the capital-gains tax rate have been class-warfare driven and contentious at best. That’s why Republican lawmakers need to get creative. There are still a bunch of constructive proposals that can bring smiles to investor-class faces, and “R”-column votes this fall.

One simple measure would be to put stock market investors on the same footing as homeowners by making turnovers of stock tax-free. So unlocking past equity gains will not be a taxable event. Another measure would be a doubling of the $3,000 capital-loss deduction. Both of these proposals would mean higher gains for shareholders and more cash oxygen for the market.

Reducing taxation on dividends would be another pro-investor move. When a corporation pays out dividends to its investors it implies that it has plenty of cash in the bank. Whether or not investors have faith in a company’s books, they will be impressed with large dividends. But right now, dividends are taxed on both the corporate level and the personal level. Relieving this double-taxation would mean more dividends for investors and more confidence in the market. They’d be impressed.

Also, as Investor’s Business Daily publisher Bill O’Neil suggests, giving new business start-ups tax-free status for a couple of years would be a nice incentive for entrepreneurs. Unhindered by corporate taxation, businesses could get into gear more quickly. After a set period, they could be taxed at half the normal corporate rate and then graduate to the full rate after they have had a chance to establish.

Finally, supply-side father Arthur Laffer proposes that investors who purchase stock in the next year, and hold it for three years, have the ability to cash in that stock free of capital-gains penalties. That incentive would get needed dollars into the market — right now.

GOP lawmakers have a lot going their way. First, the economic situation is not that bad. Normally, an economy will grow at 6% to 7% in its first year of recovery. But the domestic economy has grown at 3.8% annually over the past three quarters. While the economy certainly could be doing better, it is still expanding. We are in a recovery. Even the soft 1.1% growth-rate in second-quarter GDP has its silver linings — such as a 12% rise in technology capital spending and a near 3% increase in gross domestic purchases (which exclude the widening trade gap). So throw those double-dip recession scenarios out the window.

Republicans can also count out the usual political issues of high unemployment and high inflation. These are not problems today. And as for the corporate scandals, the president and congressional Republicans inoculated themselves from a voter backlash by supporting a business-reform bill and preventing the establishment of a new runaway regulatory agency.

Yes, voters perceive Republicans as the defenders of business. But most voters, and especially shareholding voters (who are the majority), know full well that healthy businesses are the engine of jobs and economic growth.

What will matter most come this November is the state of the stock market. By promoting a package of new tax incentives — and pushing for a Federal Reserve expansion of the basic money supply to aid debt-crunched businesses — Republicans can save their necks. But they must craft a new growth plan aimed directly at the very investor class that will tip this election one way or the other.

Larry Kudlow — Larry Kudlow is CNBC’s senior contributor. His new book is JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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