How America beat the 70’s

With rising oil prices, rising unemployment, and inflation eating away at the U.S. economy, a powerful politician pushed for a populist tax hike in Washington 30 years ago. The year was 1978, the push for a tax hike came from President Jimmy Carter, and the tax in question was on capital gains. Carter wanted to tax capital gains at the same rate as ordinary income – effectively doubling the rate for many taxpayers, says Mark Bloomfield, president and CEO of the American Council for Capital Formation.

Carter didn't get his tax hike. Congress passed a tax cut instead. The 1978 capital gains tax cut was an economic success, as we saw in the 1980s. What followed was a period of fluctuating capital gains tax rates. But a second round of substantial rate cuts came in 1997. Again the result was a clear benefit to the economy, says Bloomfield:

The tax cut took the top capital gains tax rate to 20 per cent from 28 per cent.

According to a 1999 study by David Wyss of Standard & Poor's DRI, an economic consulting firm, the 1997 tax cut increased GDP, investment and jobs, and raised federal tax receipts.

Rep. Charles Rangel (D-N.Y.), chairman of the House tax-writing committee, is proposing to increase the tax on capital gains. He is also calling for a full-scale and honest debate on tax policy. This is a debate we should welcome, says Bloomfield:

The Organisation for Economic Co-operation and Development (OECD) points out that nearly half of the 30 countries surveyed in a recent study do not subject individuals to any tax on capital gains.

Consider that not keeping our capital gains tax at its current rate (15 per cent) will put the U.S. at a disadvantage when competing for global capital.

On Jan. 20, a new president and a new Congress will begin work on a new economic policy. The lessons from cutting capital gains taxes over the past 30 years shouldn't be ignored, says Bloomfield.

Source: Mark Bloomfield, How We Beat the '70s, Wall Street Journal, March 13, 2008.

For text: http://online.wsj.com/article/SB120536977668532201.html

For more on Taxes: http://www.ncpa.org/sub/dpd/index.php?Article_Category=20

FMF Policy Bulletin/ 25 March 2008