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U.S. needs cut in capital gains tax

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Recent economic indicators confirm what we've feared for some time: Our country is in the midst of an economic slowdown. Reports released this month show that, at best, the economy is at a virtual standstill.

Last quarter's growth rate fell to an anemic 0.2 percent while the unemployment rate jumped to a four-year high of 4.9 percent. Layoffs have increased dramatically, as more than 1 million jobs have been lost over the past 13 months.

And in the wake of the past week's tragedies, the Dow Jones Industrial Average suffered the single largest one-day loss in its history, and Boeing announced 30,000 layoffs.

One can't help but wonder: Is this downturn something we have to just wait out? Is recession inevitable? Is there no remedy? I am convinced that we can and we must be economically proactive.

President Bush has indicated that a mix of "Keynesian and supply-side" economic policies offer the best opportunity to avert an economic crisis.

Congress has already approved $40 billion in emergency government spending, and there is more to come. This is the Keynesian piece. Now we need the supply-side component.

I believe that the best way to spur life back into our lackluster economy is through a reduction of capital gains taxes. Capital gains taxes are levied on individuals when they sell an investment for profit. Every time someone sells a piece of real estate, a stock or a bond, they are tagged with the capital gains tax.

For example, suppose a family purchased $1,000 worth of stock last year, and that they now want to sell that stock at the current value of $1,200. Under today's rates, they must pay at least a 20 percent tax on the $200 capital gain profit. That's $40 of the $200 increase paid in taxes.

Equally egregious, the IRS fails to take inflation into account when calculating the gain, disproportionately hurting long-term investors. In short, the capital gains tax increases the costs associated with the creation of capital and investment. Knowing that any profit gained on an investment will be taxed at such a high rate provides an unmistakable disincentive to save and invest.

High capital gains tax rates also place our country at a competitive disadvantage to other nations. While many foreign governments impose no tax on long-term capital gains — encouraging savings and investment — our capital gains rates are some of the highest among industrialized economies. On average, the capital of a U.S. business or farm is taxed at a rate 80 percent higher than that of foreign competitors. Yet even at such high rates, the capital gains tax brings in only a small percent of total federal revenues, making up a mere 3 percent of total tax receipts.

Reducing the capital gains tax will encourage investors to unlock cumulative gains of the past, thereby freeing funds to be reinvested in more future-oriented, entrepreneurial, growth generating enterprises. In fact, the Cato Institute estimates that an incredible $7.5 trillion exists as unrealized capital gains that are "locked-up" to avoid taxation.

Reducing the capital gains tax rate would free a large amount of that "locked-up" money, encourage private-sector capital formation, increase output and real wages, boost business and job creation, and help lead to a rapid economic recovery.

Of additional benefit, history teaches us that a capital gains tax cut can actually increase federal receipts. There is ample data indicating that by spurring economic growth and activity, a capital-gains tax cut actually produces more tax revenue for the government. Both of the past two capital gains tax rate cuts (in 1981 and 1997) were followed by remarkable gains in the stock market and the economy. In both cases, the economic shot-in-the-arm the capital gains tax cut provided lead to significantly higher federal revenues.

Over the years, opponents of a capital gains tax cut have argued that reducing capital gains tax rates largely benefits wealthy Americans. This argument ignores recent trends.

Today, more than half of all Americans invest in the stock market. We have become a nation of investors, and a capital gains tax cut would benefit Americans in every tax bracket.

Our nation must quickly respond to last week's terrorist attacks on two fronts. The most obvious is through a swift, fierce and unrelenting military and counterterrorism response. The second course of action is to advance policies that ensure America's economic strength.

We should shudder at the prospect of fighting a global war on terrorism while simultaneously combating a worsening economy. An immediate capital gains tax cut will help ensure that our nation's economic engine is running full throttle to back President Bush's war against terrorism. A capital-gains tax cut would promote economic growth and development, revitalize the sagging economy and bring needed revenues to Washington.

Considering our current situation, I believe that is exactly what our ailing economy needs.


Rep. Chris Cannon, R-Utah, is serving his third term in the U.S. House of Representatives.