Cap gains break would be a boon to economy
Say what you will about the auto company heads in Detroit, but they sure know how to
sell cars. Throughout much of last year, faced with a frustratingly sluggish economy and
constant concerns that consumer jitters would finally undermine sales, they effectively
used incentives, particularly zero percent financing deals, to keep people coming into
showrooms to make big ticket purchases, before that bargain would end. Disappointing
federal reports on jobs, sluggish growth and lax business investment mean that it’s now
time for Congress and the President to use the same kind of creativity to give investors a
similar incentive to buoy the markets and get investment going again.
Detroit pumped up consumer demand with auto financing deals that were too good to
pass up. We can do the same on the investment side, creating deals that are too good to
pass up because they won’t be here forever. Specifically, I am proposing a two-year
window in which new investments will be taxed at a significantly lower capital gains tax
rate when they are sold. In other words, invest now (when our economy needs it) and
when you sell, Uncle Sam will take a smaller share of whatever gains you make.
Now, I would love to follow the Detroit model even further and cut the capital gains tax
rate for these new investments down to zero percent, but Washington isn’t bold enough to
do that. Instead, H.R. 44, the Investment Tax Incentive Act of 2003, would, for assets
purchased during the ensuing two years, lock-in a reduced capital gains tax rate - from 20
to 10 percent for individuals, and from 35 to 20 percent for businesses. Only new
investments made during the two-year window, and held for at least one year, would
qualify.
This measure would provide real short-term stimulus to the parts of the economy most in
need of help – investment and job creation. Lowering the future capital gains tax rate for
new investments will increase the value and price of assets. This will give markets a
boost and raise portfolio values. The two-year time frame creates a further incentive to
buy now, providing near-term stimulus. Finally, lower capital costs will spur businesses
to purchase the plants, machinery and other equipment needed to expand and create new
jobs. In fact, a recent study by The Heritage Foundation estimates that in the two-year
period targeted, H.R. 44 would add over 1 million jobs and create over $180 billion in
new business investment.
Of course, this is budget season, so we can’t forget the Washington “bean counters.” But,
they will find something to like as well. By including a one-year holding period for new
investments to qualify for the lower rates, no one, no matter how opposed to tax
reductions, can claim this will reduce federal revenues in the first year. In fact, the economists of Congress’ Joint Tax Committee (JTC) recently projected a $100 million
revenue increase in the first year, with an additional $600 million in revenue in the
second. Not only are those positive numbers likely underestimated, failing to account for
rising asset values, they can’t really account for future economic growth. Once you get
beyond two years in terms of overall federal revenues, accelerated economic expansion
will more than account for any future costs to the federal treasury.
There was a time when critics of tax incentives aimed at investors could play the class
warfare card with some impunity. Those days are gone. Middle income Americans
increasingly make up “The Investor Class.” More than half of those with incomes
between $25,000 and $49,999 own stock, and over 50 percent of all Americans own
some type of asset that would be impacted by this proposal. In other words, the same
people who have taken advantage of zero percent auto financing deals to purchase a new
car will take advantage of a deal to help them pay for their children’s education, purchase
a new home, or plan for their retirement.
Capital investment is the high octane “fuel” that can take us from a sluggish, jobless
recovery to healthy economic growth. Nearly $85 billion of venture capital alone is
sitting on the sidelines looking for investments. By providing an incentive to get investors
back into the market, we can create and expand businesses that put workers back on the
job. Congress and the President should not miss this opportunity. As those car ads often
say, this offer won’t last long.
Rep. David Dreier, California Republican, is chairman of the House Rules Committee and co-chair of the bipartisan, bicameral Zero Capital Gains Tax Caucus
