Capital Formation Newsletter
January-February 2005, Vol. 30, N0. 1

(PDF Version)

ACCF Hosts First-Vice President of the European Parliament

“Why doesn’t the European economy work as well as the economy of the United States,” Dr. Alejo Vidal-Quadras Roca, First-vice President of the European Parliament, queried ACCF supporters at the February 10 Capital Formation Forum. The session marked the first of the ACCF’s forums for 2005.

Measured against almost every economic statistic, the U.S. economy outperformed Europe over the past four years, despite the plan initiated in 2000 to promote a more competitive and knowledge-based European economy by 2010. The EU’s recent mid-term assessment showed European economies had not improved as hoped under the plan, according to Dr. Vidal-Quadras.

Stability, cohesion and economic growth are the three legs of the European economic model, the EU official said, adding, “we simply can’t seem to make all three improve at the same time.” European economies are good at stability and have maintained fiscal discipline very well. They are good at cohesion – in fact, cohesion is the defining feature of the European economic model, which offers generous social benefits. Where European economies fail is in promoting economic growth. “We have not yet found the way to bring about good economic growth and job creation,” Dr. Vidal-Quadras said. Though it is tempting to blame this problem on difficulties in the international setting, growth in European economies has lagged since the 1940s, he said.

To move forward, the European economy needs deep structural reforms and an environment that is respectful of market participants, Dr. Vidal-Quadras emphasized. “We Europeans hope our transatlantic partnership with the United States can now be strengthened to bring peace and prosperity to a confusing and dangerous world.”

Dr. Vidal-Quadras also praised the work of the Brussels-based International Council for Capital Formation, ACCF’s sister organization, in Europe, and Dr. Margo Thorning, ICCF managing director and senior vice president and chief economist of the American Council for Capital Formation. The ICCF’s work in Brussels is very useful in bringing the concerns and views of the U.S. before the European Community, the European Parliament and other organizations in Brussels.

Long active in Spanish politics, Dr. Vidal-Quadras was first elected to the European Parliament for the 1999-2004 term and re-elected in 2004, when he was elected First-vice President. He is a Full Professor of Atomic and Nuclear Physics at the Universidad Autonoma de Barcelona, presently on leave of absence.

Dr. Alejo Vidal-Quadras Roca, First-Vice President of the European Parliament, Mrs. Vidal-Quadras and Dr. Margo Thorning visit at an ICCF Economic Policy Evening on February 9.

New Treasury Data Confirm ACCF Analysis of Thirty Years Ago

Almost thirty years ago, the American Council for Capital Formation had its first impact on US tax policy with its analyses of the impact of lower capital gains tax rates on Federal revenues and the US economy. The latest data from the Treasury again confirm ACCF findings on the continued dynamic impact of capital gains tax cuts in fostering economic growth and thereby greater revenues to the US Treasury.

Over the past three decades, the ACCF has become a recognized leader in providing credible analysis of the beneficial impact of lower taxes on saving (IRAs and 401ks, for example) and investment (expensing of investment rather than depreciation) on economic growth, job creation and government revenues. The ACCF’s research is particularly relevant to the current national debate on tax reform and the consideration policymakers are giving to replacing or supplementing the current US income and payroll tax regimes with a consumption-based tax.

In 1978, when President Carter proposed taxing capital gains at ordinary rates, the ACCF worked with leading econometric modeling firms to estimate the impact of high capital gains taxes on investment, employment, GDP and government revenues. ACCF’s research was the first “dynamic” rather than “static” analysis of a major tax change on the economy and Federal tax receipts. ACCF provided policymakers for the first time with appropriate data to compare with the analyses provided by government sources. The “revenue impact” of a tax cut was as important in the legislative process in the 1970s as it is today. When the ACCF demonstrated that slashing the then 50-percent top capital gains rate in half, a proposal initiated by the late Congressman Bill Steiger, could result in an increase in federal revenues because of the “unlocking” effect and the positive dynamic impact on the economy, the Steiger capital gains tax cut overcame a significant legislative obstacle and became law.

Revenues to the US Treasury from realized capital gains under a top capital gains tax rate that could range up to 50 percent in the 1970s averaged under $8 billion a year. After the maximum capital gains tax rate was cut to 28 percent in the late 1970s, revenues rose to $13 billion annually. When President Reagan reduced the maximum capital gains tax further to 20 percent, revenues continued to grow annually, reaching $26 billion in 1985, the year before the Tax Reform Act of 1986 increased the top capital gains tax rate to 28 percent. Even this modest increase in capital gains tax rates had a visible negative impact on Treasury revenues.

In the late 1990s the ACCF worked closely with Senators Joseph Lieberman (D-CT) and Orin Hatch (R-UT) on a new capital gains tax cut. The resulting new maximum capital gains rate of 21.9% unleashed even greater new revenues to the Treasury, again at lower tax rates, as the ACCF had predicted. Revenues from realized capital gains rose from $79 billion in 1997 under the old higher rate to $89 billion in 1998, peaking at $127 billion in 2000. The latest capital gains tax cut to a maximum 15% rate, authored by Ways and Means Chairman Bill Thomas (R-CA) and signed into law as part of President George W. Bush’s recent tax cut package, can be expected to show the same dynamic impact as earlier capital gains tax changes.

In Memoriam ...David F. Bradford, Tax Policy Expert and Center Board Member

The Honorable David F. Bradford, a widely recognized authority on tax policy and a member of the Board of Scholars of the ACCF Center for Policy Research since 1992, died in Princeton, New Jersey on February 22. Dr. Bradford was a professor of Economics and Public Affairs at Princeton University’s Woodrow Wilson School. He also held positions with the National Bureau of Economic Research and the New York University School of Law. Professor Bradford was a top economic adviser to former President George H.W. Bush as a member of the Council of Economic Advisers from 1991 to 1993 and also served under Presidents Ford and Reagan. He was deputy assistant secretary for Tax Policy at the Treasury Department in 1975 and 1976, where he was one of the principal authors of the study, “Blueprints for Basic Tax Reform.”

ACCF President Moderates Panel of Tax Experts at Monday Group Meeting

As the national debate on Social Security reform engages public attention, Mark Bloomfield, ACCF president, moderated a panel discussion on February 14 on the myths and realities of reforming one of the most important elements of retirement financing for many Americans. Hosting the session were members of “The Monday Group,” an organization made up of the leaders of key industry associations in Washington, DC.

Public policy experts on the panel were Congressman Jim McCrery (R-LA), chairman of the House Ways and Means Committee Subcommittee on Social Security; Dr. Douglas Holtz-Eakin, director, Congressional Budget Office; and David Wessel, deputy Bureau Chief of the Wall Street Journal.

Center Scholar Appointed to President’s Advisory Panel on Tax Reform

Professor James M. Poterba, Mitsui Professor of Economics, Massachusetts Institute of Technology and a long-time member of the Board of Scholars of the ACCF Center for Policy Research, was named to President Bush’s Advisory Panel on Tax Reform. President Bush charged the Advisory Panel with developing reforms to make the tax code simpler, fairer and more growth oriented. Former Senator Connie Mack chairs the panel; former Senator John Breaux serves as the co-chairman. Professor Poterba serves as Associate Head of MIT’s Department of Economics. He has taught at MIT since 1982.

ACCF Testimony Shows Maine "A Better Way Forward" on Climate Policy

Dr. Margo Thorning ACCF senior vice president and chief economist testified on February 22 as an invited witness before the Joint Natural Resources Committee of the Maine Legislature. Dr. Thorning’s testimony focused on the need to choose a more productive approach to reducing greenhouse gases than the “targets and timetables” approach endorsed by the State of Maine. Programs with aggressive near-term emission reduction targets and timetables will inevitably be replaced by a new framework for addressing climate change: one that encourages economic freedom and economic growth that will accelerate the trends towards reducing carbon intensity per unit of output and could lead to reductions in overall emissions,” Dr. Thorning told Maine legislators. “In any policies that Maine considers, it should carefully evaluate the costs to its citizens and the benefits to its citizens before enacting policies that could do more harm than good.” (Dr. Thorning’s testimony is included as a Special Report in the January-February issue of Capital Formation. This testimony and Dr. Thorning’s testimony before the Environment Committee of the General Assembly of the State of Connecticut are available on the ACCF’s Website, www.accf.org.)

Inaugural Session of ACCF Executive Roundtable

On February 15, the founding members of the newly established ACCF Executive Roundtable gathered for their inaugural ACCF Economic Policy Evening. Membership in the new group is limited to young business leaders, primarily CEOs or their equivalent (age 50 and under). Guests at the February 15 dinner included 11 founding members of the ACCF Executive Roundtable and a number of young “rising stars” from Congress, the media and the White House.

Representative Melissa Bean (D-IL)		Edward P. Nordberg, Jr., managing partner, Chainbridge Capital, and Richard Russell, associate director for Technology, White House Office of Science and Technology
Mark Bloomfield, ACCF president and CEO, Peter A. Batten, chief executive officer, Premium Hospitality Group, Representative Bobby Jindal (R-LA) and James Harding, Washington bureau chief, Financial Times.		James Harding, Washington bureau chief, Financial Times, and Representative Artur Davis (D-AL)
Representative Melissa Hart (R-PA)		Neil Irwin, staff writer, Washington Post