NCPA - National Center for Policy Analysis

Capital Gains Tax Cuts Help Markets Recover

September 20, 2001

Even before the terrorist attack last week, Republicans were proposing a cut in capital gains tax rates, among other measures, in order to stimulate the economy. Experts say the case for a tax cut is even stronger now.

  • The nearly 800-point decline in the Dow Jones Industrial Average this week hurts all American investors and imperils the jobs of millions of workers.
  • Cutting the capital gains tax in half, from 20 percent to 10 percent, would pump value back into stocks and increase investor confidence.
  • While other tax cuts are desirable, only a cap-gains cut provides instant relief for the economy -- and virtually every time the rate has been reduced, the stock market has risen.
  • Most recently, when rates were reduced in 1981 and 1997, the stock market soared in value.

The reason markets rose is simple: a share of stock is valued at the expected future earnings of the company -- after taxes. When the capital gains tax is lowered, the after-tax earnings of every company in America rise -- thus, the stock market must rise in value.

The anticipated military response to the terrorist attack also makes this the right time for the cut, experts argue. From Lincoln to LBJ, presidents raised taxes when they went to war. Ronald Reagan -- in his boldest and most ridiculed decision -- did the opposite, cutting taxes and beginning a massive military buildup. As a result, the stock market boomed, the economy was revitalized and we won the Cold War.

Source: Stephen Moore (Club for Growth) and Jeffrey Bell (Capital City Partners), "Cap-Gains Cuts Can Rally Battered Markets," Wall Street Journal, September 20, 2001.

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