AS WE APPROACH the new millennium, we should be working to ensure that the United States remains the center for world influence in the 21st century.
Maintaining American economic dominance is important for two reasons. First, our children and grandchildren deserve the opportunity for prosperity that only a strong America can provide. If America remains the center of influence and opportunity, all Americans will have far better prospects for success and an improved standard of living.But the second reason goes even deeper. A great nation has to set itself on a course to achieve something greater than itself. And I believe that the greatness we want to accomplish stems from the fact that ours is the only nation that promotes the principles of freedom, justice, democracy and capitalism.
Fundamental to this legacy, I believe, is the utter necessity of expanding economic growth and opportunity. The policies that define the Republican agenda are of critical importance in creating the environment, indeed the foundation for unparalleled prosperity.
For example, there is serious debate currently taking place on Capitol Hill regarding our archaic and oppressive tax code. As we progress, our primary objective must be to determine what our actions will do for economic growth, job creation, business formation and technology - in short, what effect will we have on our growing economy?
One of the most critical components of the current tax code that affects economic growth is the capital gains tax. It is also, unfortunately, an excellent example of an unfair, burdensome and growth-inhibiting tax.
A perspective that I find interesting is to think of the capital gains tax as voluntary. For example, if you think the tax rate is too high, you just voluntarily say "I'm going to keep my money, I'm not going to give it to the government, and I won't sell."
As a result of the high capital gains tax rate, this tax has become a wall that has been built around the investments of aging technologies. What Republicans are trying to do is rip down those walls. We want to let capital flow into the new technologies and new industries.
Just how unfair is the current capital gains tax? Consider the investor who put $100,000 into some type of investment (a small business, shares of stock) in 1980.
The investor then sold that asset in 1992 for $200,000, making $100,000. The investor owes $28,000 in capital gains taxes (based on the 28 percent tax rate on long-term capital gains). According to the consumer price index, inflation rose 70.4 percent between 1980 and 1992, a 4.5 percent annual rate.
This means that, even though the nominal gain was $100,000, the real gain was only $29,600 ($70,400 came from inflation). The effective real tax rate is much higher than the 28 percent that has been advertised, and is in fact 94.6 percent ($28,000 of $29,600). If the investor had sold the asset for less than $197,778, the tax burden would be greater than the total return. The effective tax rate would be over 100 percent.
Is lowering the capital gains tax rate giving a tax break to the rich? No, because it ignores the crucial issue of income mobility.
The income mobility rate in the United States is so high that, according to Treasury Department tax data, 85.8 percent of the people who filed in 1979 that were in the bottom income category (or quintile) had moved up by 1988.
Cutting the capital gains tax is central to improving our economy and enhancing opportunity and prosperity for everyone in the coming century.