Fueling Our War Effort With Economic Growth

Commentary by Pete du Pont

"Terrorists attacked a symbol of American prosperity; they did not touch its source. America is successful because of the hard work and creativity and enterprise of our people. These were the true strengths of our economy before September 11, and they are our strengths today.

"And ladies and gentlemen of the Congress, I thank you, their [American people] representatives, for what you have already done and what we will do together.

"We will come together to take active steps that strengthen America's economy and put people back to work."

With those words President Bush signaled a call to arms for the Congress to help fuel America's war effort by re-igniting the economic growth that will be necessary to sustain us. After all, the lesson of Reagan's Cold War victory is that to win a great protracted struggle, we must have a mighty military machine AND a robust economy to finance that defense. While Bush will focus on driving the terrorist network "from place to place until there is no refuge or no rest," the Congress should focus on uniting to implement policies that will stimulate our stalling economy.

Here is a simple suggestion. Cut significantly or eliminate all together the capital gains tax now. This was a good idea before the events of September 11, and it is an even better idea now that the markets have fallen daily since re-opening.

It is important to understand that our economic problems have been almost purely market and business development driven. Consumer spending prior to the attack was steady, and unemployment was still low. In the aftershock of the stock market fall, investors have turned completely risk adverse, preferring to keep their new money in safe havens instead of putting it at risk in the economy. Americans are not even spending their rebate checks, instead saving the money for a rainy day or using it to pay down personal debt.

While the Fed has been lowering interest rates and expanding the money supply, it hasn't seemed to have done the job. A substantial capital gains cut can succeed where Fed cuts have failed precisely because its reduction instantly increases the underlying value of every share of stock of every American company. As Club for Growth president Stephen Moore pointed out recently; "If we can keep stock values high and reinvigorate the economy, every American gains: our soldiers, our union workers, our 100 million share holders, and our children."

Not only would the value of stocks rise, which would lead to an increase in further investment, but a rate cut will also lead to an increase of tax collections for the first couple of years, which could prove important for the war effort. For proof one need not look any further than the last time Congress cut the capital gains rate. Following the reduction from 28 to 20 percent, revenues exploded. In 1996, the last year with the 28 percent rate, the government collected $62 billion in capital gains receipts. In the three years immediately following the reduction, the government collected $79 billion, $89 billion and over $110 billion respectively - a rise over three years of 74 percent even though the rate was reduced almost 30 percent.

Prior to the horrific events of September 11, there was genuine bipartisan movement towards reducing the capital gains rates. Even Massachusetts Democrat John Kerry signaled his openness to the idea. There are some discouraging warnings in news accounts of the stimulus negotiations, however. Several reports indicate that key congressmen are reluctant to allow any long-standing priorities of either party to be included in the final package. To do so would supposedly "not be in the spirit of national unity." This would seem to exclude a capital gains reduction - long a GOP favorite.

Yet it seems to me that the spirit of national unity can only be dampened if our elected leaders choose not to do what is clearly in the nation's best interest, just because it might mean enacting an idea championed by the other party. Capital formation and business creation mean more jobs, higher incomes and increased prosperity. What could be more unifying?