ACCF Alums Fill Key Policy Slots in New Administration

A Tax Policy Agenda by Dr. Charls E. Walker

Capital Gains Tax Cuts Benefit Some Investors But Rates Still High

ACCF and Center Elect Three New Directors

Impact of Kyoto Protocol on Developing Economies Discussed at Briefing for Diplomatic Community, Congressional Staff

ACCF Alums Fill Key Policy Slots in New Administration

Paul H. O’Neill, chairman of Alcoa from 1987 to present and a former director of the ACCF, is Secretary-designate of the Treasury. Andrew H. Card, Jr., former Secretary of Transportation and an ACCF director since 1997, is chief of staff-designate to President-elect George W. Bush. Dr. Lawrence B. Lindsey, a former governor of the Federal Reserve board and a participant in numerous ACCF programs and author of research on the taxation of capital gains sponsored by the ACCF Center for Policy Research, is assistant to the President for economic policy.

Messrs. O’Neill and Card and Dr. Lindsey join numerous other ACCF and Center directors, including current Treasury Secretary Lawrence H. Summers and ACCF board members Lloyd M. Bentsen and George P. Shultz, in serving as high-ranking policymakers in both Democratic and Republican administrations.  

A Tax Policy Agenda

by Dr. Charls E. Walker,
Former Deputy Secretary of the Treasury and
Chairman and Founder, American Council for Capital Formation

A NUMBER of political observers forecast gridlock in the 107th Congress. They make two basic points: First, the essentially tie vote for the candidates leaves the new President with no mandate for action. Second, the almost even split between party membership in Congress will prevent the new President from marshaling sufficient troops to deal with the several important but controversial issues that now confront policymakers.

A correct analysis? Not necessarily. Take so-called “mandates.” In past presidential races, “mandates” transmitted through the ballot box have been few and far between, yet close elections have often been followed by highly constructive congressional output. This could well occur in the new Congress. This is primarily because the 2000 presidential campaign was strongly issue-driven; in contrast to most modern campaigns, the candidates’ personal qualities seem to make little difference as voters made it clear they were disgusted with partisan bickering in Washington and felt it was high time to get on with solving tough problems. Candidate views on how to deal with Social Security, health care, taxes, education, and foreign policy were set forth in unusual detail. This may not describe a “mandate,” but the effect—a strong voter-pushed drive for constructive bipartisan solutions to important public policy issues—can well be the same.

Neither do narrow congressional margins necessarily pose a big problem—in fact, they could well afford a significant opportunity for a skilled chief executive. I am one of the many who has worked legislation for a President of one party while the opposition party maintained heavy margins in each House. Despite such margins, we were able to achieve respectable legislative records.

Proponents of the “narrow-margins” gridlock argument fail to understand this nation’s legislative process. To be sure, in a parliamentary system such as in Britain, parties rule and, in contrast to the United States, members are not responsible to any geographical set of voters. Here, the influence of parties has waned significantly over recent decades; here, on the big issues, members’ constituents in most cases guide the vote, through surveys, direct contact with members, letters and op-eds in newspapers, town meetings, and the like. Consequently, the task of a chief executive with a constructive legislative program is to stitch together the often different, across-party-lines “coalitions” that produce majorities on committees and in each House. The potential for such coalitions has existed in the past—even when divided government prevails. An examination of its ideological make-up suggests that ample opportunities for constructive coalition-building will exist in the new Congress.

An Ambitious Agenda

ACCF is therefore constructing an ambitious pro-capital formation agenda for tax legislation in the 107th Congress. Four issues head the list.

First, repeal of the Federal estate tax. Significant voter approval of repeal of the tax emerged in the last congressional session and was further underlined during the campaign. The estate tax issue is no longer mega-rich vs. the poor, or Republican vs. Democrat. The issue is when and how much.

Some friends whom I respect greatly, including a minority of ACCF board members, have asked me how the Council could support what they view as a major retreat from fair taxation. The fundamental answer is simple and has been the credo of ACCF since its founding in 1975: Saving, whether individual or business, should be taxed lightly if at all, and certainly no more than once. Yet thrifty Americans have suffered multiple taxation since the inception of the income tax. This is not only unfair to those who forego consumption today in order to help insure a better tomorrow; high taxation of saving and the investment it funds is, as model after economic model has shown, anti-growth, anti-jobs, and anti-competitive for U.S. businesses in world markets. (It is through careful examination of the connection between the estate tax and growth that ACCF is making one of its major contributions to debate on the issue.)

Second, at least a start toward cutting the heavy federal tax burden on productive business investment. The need for a level international playing field for U.S. companies requires that Congress address sooner rather than later the fact that this country taxes business investment (including environmental investment) in equipment (a form of business saving) at one of the highest rates in the industrial world. The overpowering strength of the U.S. economy in recent years—which many mainstream economists believe is ebbing and will continue to ebb in the months ahead—has thus far obscured the tax competitiveness problem. If Congress wants to fix the roof before the barn begins to leak, however, it needs to embark very soon on sensible measures to lower the taxes on growth-producing business and environmental investments.

Third, provision for tax-free “rollover” of assets subject to capital gains tax. In 2001, ACCF will bring back to public, press, Administration, and congressional attention a sensible pro-capital formation tax measure which has been considered in the past but has since dropped from sight. Popularly known as “rollover,” this amendment to the tax code would permit investors to sell, tax-free, any appreciated asset (such as a corporate stock), so long as the proceeds were reinvested within a stated time in other taxable assets. Members of the new “investor class,” who have seen some of their mutual fund holdings subjected to unexpected and what they view as unfair capital gains taxes, would welcome the legislation. From an economic standpoint, the amendment would add great mobility to capital markets—and thus in the long run promote higher capital values—as trillions of dollars of now “locked-in” investment shifted to other assets. In addition, the availability of these funds could strongly promote entrepreneurship by greatly expanding the pool of available capital.

Fourth, simpler and more generous tax incentives for individual saving. ACCF will work to simplify, systematize, and improve the “catch-all” set of saving incentives that now exist in the tax law. ACCF’s ultimate goal, shared by many, is to eliminate all taxes on individual saving. In the meantime, a clarification for individual savers of what is now actually in the tax law is badly needed.

Conclusion

The recent slowing of growth in the U.S. economy—indeed, some economists are even warning of recession—strongly supports the case for congressional enactment of pro-capital formation tax measures in the months ahead. To a considerable extent, analysts attribute the impressive strength of the U.S. economy in recent years to strong growth in capital spending. Thus the long-term competitive case for reducing taxes on business investment is bolstered by the short-term outlook for a slowing economy.

The officers and staff of ACCF cannot move the national legislative machine alone. Success requires active participation by individuals and groupsÑespecially supporters of ACCF and its Center for Policy Research.

As in the past, ACCF will provide relevant economic analysis, play a leading and/or coordinating role in the Washington lobbying community, and explain the issues carefully and thoroughly to Administration leaders, members of Congress, and the press. As we go to press, discussion concerning possible passage of a major across-the-board income tax cut is increasing. I will keep readers of Capital Formation up to date on the situation and outlook in the days and weeks ahead. —CEW

Capital Gains Tax Cuts Benefit Some Investors But Rates Still High

• Here’s the good news: The federal capital gains tax rates on assets held five years or more will drop in 2001 from 20 percent to 18 percent for assets acquired after December 31, 2000. For investors in tax brackets above 15 percent, the 18 percent tax rate cannot be used until 2006. An investor can, however, make a special election to make pre-January 1, 2001, property eligible for the 18 percent tax rate sooner than 2006 by paying tax on the fair market value of the asset on January 1, 2001. For investors in the 15 percent bracket, the capital gains tax rate drops from 10 percent to 8 percent after December 31, 2000, and the asset does not have to have been acquired after December 31, 2000, to qualify for the 8 percent tax rate as long as it has been held for five years or more.
  
  
• Now the bad news: U.S. investors (who are now half of U.S. households) face capital gains tax rates on both short- and long-term gains which are among the highest in the industrial world. A 24-country survey shows that while long-term gains for individuals are taxed at a top federal rate of 20 percent in the United States, the average tax rate in the other countries was only 14.8 percent. The short-term capital gains rate differential between the United States and its competitors is even greater: individual U.S. investors face a top federal rate of 39.9 percent compared to an average of only 18.4 percent for investors in the survey (see “Capital Gains Taxation and U.S. Economic Growth,” testimony before the Standing Committee on Banking, Trade and Commerce of the Senate of Canada, December 16, 1999, for details). Corporate capital gains are also taxed at much higher rates in the United States than abroad; the rate in the United States is 35 percent on both short- and long-term gains compared to an average of 22.5 percent for short-term and 19.3 percent for long-term gains in the survey.
  
  In most states, investors must also pay state capital gains taxes. Preliminary data from a new ACCF Center for Policy Research report show that the combined federal/state capital gains burden for a household with income of $60,000 per year in California is 28 percent, for New York the figure is 27 percent. The combined corporate capital gains rate in California is 41 percent, in New York it’s 40 percent. High U.S. capital gains tax burdens reduce economic growth by raising the cost of capital for new investment and discouraging saving and entrepreneurial activity.

ACCF and Center Elect Three New Directors 

At their December meeting, the directors of the American Council for Capital Formation and ACCF Center for Policy Research elected new board members. The expertise and talents of these individuals will add a new dimension to the already-distinguished boards of both organizations. The ACCF Board welcomes the Hon. Bill Archer, chairman of the House Ways and Means Committee, 1995–2000, and Mr. David B. Duncan, partner, Arthur Andersen LLP. The Center’s board of scholars welcomes Prof. N. Gregory Mankiw, professor of economics at Harvard University and author of two of the most widely used textbooks on economics.  

Impact of Kyoto Protocol on Developing Economies Discussed at Briefing for Diplomatic Community, Congressional Staff   

The ACCF Center for Policy Research continued its series of high-level policy briefings for the Washington diplomatic community and congressional staff with an October 26 forum at the Cosmos Club. Dr. W. David Montgomery, vice president of Charles River Associates and a leading climate policy expert, presented his new research on the Clean Development Mechanism (CDM), one of the flexibility mechanisms of the Kyoto Protocol on climate change. Dr. Montgomery’s study found that while the CDM has the potential to reduce the economic burden of the Kyoto Protocol, it is inferior to full global emissions trading as a cost-reduction device.

For information regarding future briefings on economic aspects of the Kyoto Protocol, please contact Dr. Margo Thorning, senior vice president and director of research, at 202/293-5811 or mthorning@aol.com