Economic Advisers to Leading Presidential Candidates Speak at ACCF Forums

Capital Formation Tax Cuts Abroad

Annapolis-ACCF President Mark Bloomfield testifies to repeal Maryland's inheritance tax

Forthcoming Book: The Kyoto Commitments:
Can Nations Meet Them With the Help of Technology?

ACCF Association Council Meets

Economic Advisers to Leading Presidential Candidates Speak at ACCF Forums

AS IOWA VOTERS prepared to caucus on January 24, ACCF and Center supporters gathered in Washington, D.C., to hear Alan S. Blinder, economic adviser to Vice President Al Gore in his bid for the presidency, described the Vice President's economic platform and his perspective on tax cuts to promote saving and investment. Professor Blinder is currently a Visiting Fellow at the Brookings Institution, on leave from Princeton University. He is a former vice chairman of the Board of Governors of the Federal Reserve and served on President Clinton's Council of Economic Advisers in 1993­94.

"Vice President Gore's policies are more about continuity than change," Professor Blinder began. "If you liked the Clinton Administration's policies, then you will like those of a Gore Administration." He added that the three pillars of the Clinton-Gore Administration are fiscal discipline through which the national debt can be paid down; within this fiscal constraint, tax cuts and spending programs carefully targeted to specific needs and constituencies; and aggressively promoted free and open trade.

"Over the next decade, the incoming president will have a cumulative budget surplus of some $3 trillion to spend," Dr. Blinder continued. He explained that under the fiscal plan Vice President Gore has set forth, two-thirds of the budget surplus would be allocated for Social Security, with another one-eighth set aside for Medicare. The remaining 20 percent would be used primarily for health care other than Medicare, for defense spending above the baseline, and for education programs. The Vice President has also endorsed $250­$300 billion in tax cuts over 10 years. To date, the "named" cuts include a targeted reduction in the marriage tax penalty, 401(j) accounts for lifelong learning, a permanent Rcredit, and tax credits to promote health care.

"As President Clinton's premier adviser, Vice President Gore has been central to the policy decisions of the Clinton Administration. He is a politician, not an extremist, and understands the need to marshal public support and to work with Congress to achieve policy goals," Professor Blinder concluded. 

"I HAVE BEEN A SOUL MATE of the ACCF for a long time," Kevin A. Hassett, adviser to Senator John McCain on taxes and economics and a resident scholar at the American Enterprise Institute, told ACCF supporters at the February 25 Capital Formation forum. "For any student of tax policy, one area is completely non-controversial. In a rational tax system, the tax on capital formation should be zero. This result can be shown in any economic model. Taxes on capital formation inhibit investment in the plant and equipment needed for job creation, economic growth, and expanded incomes. The question is why is our tax system getting worse in its treatment of capital formation?"

"As a military man, Senator McCain identifies the objective and then decides how to get there. He believes the tax on capital should be zero and his ultimate goal is a consumption-based flat tax, which, polls consistently show, most of the nation favors. Senator McCain's tax plan offers prudent and purposeful first steps toward tax reform. His general goals include moving toward a privatized Social Security system that will stave off a coming fiscal disaster, build wealth for American families, and create a fairer, flatter tax code that will reward saving," Dr. Hassett continued.

The McCain tax plan would first set aside approximately two-thirds of the federal on-budget surplus to "privatize" Social Security, essentially using a portion of Social Security contributions to create private accounts that taxpayers would control. Second, the McCain plan would use the remaining on-budget surplus for tax cuts for individuals, including an expansion of the 15 percent tax bracket to the $70,000 income level for married couples, and for creation of tax-deductible "Family Security Accounts" for middle-income taxpayers. Taken together, these changes add up to a consumption tax for approximately 85 percent of Americans.

"A consumption tax could not be fully effective without expensing for corporations and Senator McCain would move in that direction if elected," Dr. Hassett added.

In conclusion, Dr. Hassett advised ACCF supporters that, "Regardless of who wins, those who believe that the tax on capital should be zero must be vigilant because increasing taxes on saving and investment means fewer tools with which to work and an economy that cannot live up to its potential." 

“BILL BRADLEY IS THE ONLY CANDIDATE who has not laid out a 'grand plan' on taxes," Gina H. Despres, senior vice president of Capital Research and Management Company and an informal adviser to former Senator Bradley's presidential campaign, told ACCF supporters on February 11. "He has announced some loophole closers, including tax shelter abuses, that have wide popular support," she noted.

"Senator Bradley does not now support a tax cut because he has concerns over the current rate of economic growth and the potential for the emergence of inflation. However, if the economy were to slow, he would consider tax cuts," Ms. Despres said.

Tax counsel and foreign policy adviser to Senator Bradley for almost 12 years, Ms. Despres assisted him in developing the legislation that ultimately became the Tax Reform Act of 1986. She stressed that Mr. Bradley's commitment to fundamental tax reform has not wavered. "He wants lower tax rates and a broader tax base in order to let the market work, " she said, adding that he believes the income tax is preferable to a consumption tax.

Turning to the former New Jersey senator's economic priorities, Ms. Despres said that he believes that "government should do big things well." His priorities include education, universal health care, and alleviating poverty, especially for children, and he would use the tax system to achieve these goals. She also noted that Senator Bradley supports a "lockbox" approach to Social Security. For the estimated $1 trillion budget surplus above Social Security funding needs, he would apply $650 billion to health care and the remainder to pay down the federal debt and for education and the earned income tax credit, among other areas.

Ms. Despres currently is president, director and principal executive officer of the Capital Group's New Perspective Fund, vice chairman and director of the New World Fund, and a director of the EuroPacific Growth Fund. 

RECENTLY ENACTED AND PROPOSED TAX REDUCTIONS among U.S. trading partners highlight the international trend toward lower tax rates on income, saving, and investment. Among the significant enacted or proposed reforms by central governments are:

• Australia has reduced the top individual capital gains rate from 48.5 percent (with indexing for inflation) to 24 percent (without indexing); the corporate rate falls from 36 percent to 30 percent. The corporate income tax rate is being phased down from a top rate of 36 percent to 30 percent by 2002.
  
• Canada's new budget contains a proposal to reduce both individual and corporate capital gains tax rates The top federal capital gains tax rate for individuals would drop from 21.7 percent to 19.1 percent; the top corporate capital gains rate would fall from 21.8 to 14.4 percent. Corporate income taxes would be cut from a top rate of 29.1 percent to 21.8 percent.
  
• Germany proposes to cut the current tax on corporate capital gains on the sale of equities from 45 percent to zero. (Individuals already pay no tax on long-term capital gains.) The corporate income tax rate would drop from 40 percent to 25 percent. The top marginal rate on individual income would also decline, from 53 percent to 45 percent.
  
• Japan has proposed reducing its top death tax rate from 70 percent on estates over $15 million dollars to 50 percent.
  
• Romania has cut its corporate tax rate from 38 percent to 25 percent and enacted a 10 percent tax credit for investment.

Tax cuts on individual and corporate income and on capital gains will enhance saving and reduce the cost of capital for new investment among some of the United States' strongest competitors. American taxpayers and businesses already face some of the highest taxes on saving and investment in the industrialized world; for example the average top individual long-term capital gains tax rate in a 24-country survey is only 14.8 percent compared to 20 percent in the United States Similarly, U.S. corporate capital gains are taxed at 35 percent, compared to an average of 17.5 in the 24-country survey. New investment by U.S. business is also harshly taxed compared to that of our international trading partners (see Figure1).

Figure 1	Current Effective Tax Rates on Domestic Corporate Investment

As U.S policymakers debate goals for this Congressional session and for the next President's agenda, serious consideration should be given to the type of pro-capital formation tax policy changes being adopted by our competitors abroad.  

Annapolis, Maryland, February 16, 2000-ACCF President Mark Bloomfield testified as an invited witness before the Maryland Senate Budget and Taxation Committee in support of legislation to repeal Maryland's inheritance tax (Senate Bill 160). Mr. Bloomfield told the Committee, "Repeal of the Maryland inheritance tax, as well as the Federal 'death tax,' would be a positive step in promoting investment, employment, and economic growth in Maryland and the country as a whole." The testimony is included with this issue of Capital Formation.  

he Kyoto Commitments: Can Nations Meet Them With the Help of Technology?

THE 1997 KYOTO PROTOCOL requires sharp near-term reductions in greenhouse gas emissions that nations will find extremely difficult to meet. This new book from the ACCF Center for Policy Research examines industrialized countries' prospects for meeting their initial reduction quotas and whether technology will be available in the near-term to make the goals of the Kyoto Protocol achievable. Featured studies:

• The Kyoto Protocol: Can Annex B Countries Meet Their Commitments? by Mary Novak of WEFA, Inc., finds that five recent assessments prepared by government organizations plus a recent independent assessment are unanimous in their judgement of the inability of the industrialized countries of North America, the Pacific region, and Western Europe to meet the emission targets set in the Kyoto Protocol without large carbon taxes or extensive use of mechanisms such as international emissions trading. The European Community would, for example, have to cut its CO₂ emissions in the range of 20­30 percent below the 2010 baseline forecast. Such drastic reductions in energy use would seriously hamper the EC's goal of of strong self-sufficient economies.

• The Role of Technology in Responding to Concerns About Global Climate Change by Thomas Marx of General Motors presenting a study sponsored by the Business Roundtable concludes that a more effective strategy for reducing CO₂ concentrations in the atmosphere is to promote and accelerate the development of a broad portfolio of new and breakthrough technologies, their large-scale commercialization, and their global dissemination. Industry must lead the way in conducting technical and market research and in financing the huge investments needed for innovation and commercialization. Government has a critical role to play in advancing technology through its wide range of policies, programs, and actions that affect industry's opportunities to innovate and barriers to deployment.  

MEMBERS OF THE ACCF ASSOCIATION COUNCIL met with ACCF officers on January 5, 2000, to discuss the Council's public policy agenda for the coming months. Association Council co-chairs Marc E. Lackritz, president, Securities Industry Association, and Frederick L. Webber, president and chief executive officer, Chemical Manufacturers Association, led a far-ranging discussion of capital formation initiatives of interest to the group's members.

The ACCF Association Council includes 28 trade associations representing all sectors of the U.S. economy. Members have the opportunity to take part in the ACCF's programs and to participate in the economic education and research projects of the ACCF Center for Policy Research.  

For more information on the activities of the ACCF Association Council, please contact ACCF President Mark Bloomfield at 202/293-5811 or MarkBloom@aol.com.