Gekko’s Guide to Prosperity: Is the Contract Good Economics? A Scorecard

1. Reducing the Tax on Personal Savings. Score a hit for the Contract. It proposes permitting individuals to exclude 50 per cent of capital gains from their taxable income, in effect reducing the tax rate on capital gains to 15 per cent. Another provision of the Contract would introduce an expanded IRA—an IRA that could be tapped before retirement, with taxation of the interest or dividends not merely deferred but abolished.

Both these provisions will raise the after-tax rate of return on savings and investment and therefore the incentive to save and invest. This would increase the supply of credit to the financial markets, which would, ceteris paribus, reduce real interest rates.

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John Silvia

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1. Reducing the Tax on Personal Savings. Score a hit for the Contract. It proposes permitting individuals to exclude 50 per cent of capital gains from their taxable income, in effect reducing the tax rate on capital gains to 15 per cent. Another provision of the Contract would introduce an expanded IRA—an IRA that could be tapped before retirement, with taxation of the interest or dividends not merely deferred but abolished.

Both these provisions will raise the after-tax rate of return on savings and investment and therefore the incentive to save and invest. This would increase the supply of credit to the financial markets, which would, ceteris paribus, reduce real interest rates.