NCPA - National Center for Policy Analysis

Economists See Need For Capital-Gains Tax Cut

May 14, 2001

Three prominent economists at the Club for Growth are promoting a permanent reduction in the capital-gains tax from 20 percent to about 15 percent. Arthur Laffer, Lawrence Kudlow and Stephen Moore argue that the current economic slump is not the result of a slowdown in consumer spending, but rather insufficient investment -- which a cap-gains cut would reverse.

  • The Federal Reserve Board has reported that Americans lost nearly $2 trillion in wealth in just the last quarter of 2000 as a result of the stock-market decline.
  • That's the equivalent of a $20,000 evisceration in wealth and capital for each household in America.
  • They argue that it is the lack of capital formation that poses such a tall barrier to resuming the prosperous 4 percent to 5 percent growth of the late 1990s.
  • Any capital-gains cut would instantly be capitalized into the value of stocks since such relief would immediately raise investment return and lower capital costs, they contend.

Skeptics should recall what happened after the last two capital-gains tax rate cuts -- in 1981 and 1997. The economy and the stock market gained enormously.

In particular, after 1997 -- when the rate was cut from 28 percent to 20 percent -- tax revenues more than doubled to $118 billion in 2000, from $54 billion in 1996.

This plan is by no means offered as a substitute for President Bush's planned reduction of the top tax rate to 33 percent from the present 39.6 percent. That is desirable even though, in their view, the rate cut is phased in too far in the future to provide much juice for the economy right now.

Source: Arthur Laffer, Lawrence Kudlow and Stephen Moore (Club for Growth), Wall Street Journal, May 14, 2001.

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