Samuelson and the "can-do" culture

A hat tip today to Washington Post columnist Robert Samuelson and his piece on the impact of the Great Recession on the "can-do" culture, risk taking and entrepreneurship that is desperately needed to save our spiraling economy.

Risk-taking entrepreneurs are a major force for technological breakthroughs, new start-up companies, and the creation of high paying jobs. Many today believe that the ’78 cut in capital gains tax rates not only helped make Silicon Valley the center of technological breakthroughs but has also had a strong, positive, and lasting impact on overall investment, economic growth and job creation in the U.S.

Samuelson notes:

If Americans don't continue to create firms -- not just high-tech start-ups such as Facebook but construction companies, florists, restaurants, dry cleaners, engineering firms -- the economy may languish. Beginning a business is a risky, exhausting, chaotic process. Every year, there are roughly 500,000 to 600,000 company "births" and almost as many "deaths." Half of new firms don't make it to year five, says Litan.

Here's the moral of the story.

There's a warning here for the Obama administration: Complex regulations or high taxes may discourage start-ups and job creation. As for broader questions, the answers may remain murky for years. Has the mix of economic trauma and aging made us prudent -- or merely fearful? Has economic resilience survived -- or given way to a stand-pat society?

Let's not forget our competitive standing with the rest of the world. A report by Ernst & Young LLP, commissioned by the ACCF compares individual long-term capital gains taxes among 25 major economies of the world as well as major trading partners of the U.S. More than half of the countries surveyed have individual capital gains tax rates lower than that of the U.S. See special report here.

New IRET Study: Government Estimators Ignore Macroeconomic Effects of Changes in Cap Gains Tax Rates

In October we discussed two important research papers released by the Institute for Research on the Economics of Taxation (IRET) sponsored by The Searle Freedom Trust. One found that taxpayers are still sensitive to the tax rate on capital gains, and would report fewer gains if the rate were raised, while the other concluded that tax rate increases would not raise anticipated revenues.

Another great study from IRET has been released, authored by the organization's president, Stephen J. Entin. The paper is important because it examines how and how well major government bodies estimate the effects of changing capital gains tax rates.

The Conclusion:

The CBO, Joint Tax Committee, and Treasury revenue estimators ignore the macroeconomic effects of changes in the capital gains tax rate (and other taxes too) when they prepare revenue estimates for the Administration and the Congress. This practice does the government and the country a major disservice.

The estimators do adjust for taxpayers' microeconomic behavior, their short-term timing decisions concerning the realization of gains in the months before and after a change in the capital gains tax rate, but these have little effect on total revenues over time. The estimators acknowledge that there may be a longer term, more permanent realizations reaction to a tax rate change, but have generally underestimated the effect (more so at the CBO than the Treasury). The result is that they over-estimate the capital gains tax revenue increase from a rate hike, and over-estimate the revenue loss from a rate reduction.

The economic effects that are ignored are even larger than the realizations effects. Higher tax rates on capital gains depress capital formation, causing reductions in labor productivity, employment, and income. Revenues from all taxes are reduced as income is held down. The Volcker panel on tax reform would do well to consider the economic consequences of their recommendations, and not rely solely on the official revenue estimates in making their decisions.

The conclusions, sadly, will not come as a surprise to many who have followed the issue for decades and who have, like ACCF, been fighting to keep capital gains tax rates low so that capital formation will be high.

More respects for Senator Clifford Hansen

The Wall Street Journal recently paid tribute to the late Senator Clifford Hansen as "A Soften-Spoken Hero of the Revolution." See our earlier post on Senator Hansen's heroic feats in the 1978 capital gains tax cut here and WSJ item here:

Sometimes good public policy is moved forward by quiet men simply doing what's best for the country.

Last week, Clifford Hansen, the oldest living U.S. Senator, passed away at age 97 in Jackson, Wyoming. A reserved rancher, Hansen was eulogized at a memorial service this week by political science professor Pete Simpson as coming "on the scene like Shane. He did good. He fought for the right. He mounted up again and rode off into the sunset. . . . God willing, we may see him again."

Mr. Hansen, who grew up on a ranch, first served as governor of Wyoming and then in 1966 was elected to two terms in the U.S. Senate. Most of his Senate career involved parochial concerns about federal mineral rights, but in his last year he helped make economic history.

Mark Bloomfield, head of the American Council for Capital Formation, recalls that in 1978 he was turned down by many leading senators to sponsor the bill cutting capital-gains tax that was the brainchild of the late Rep. Bill Steiger in the House. Senator Hansen, who keenly understood the need for incentives to end the stagflation of the 1970s, stepped forward and said "By Gosh, I will do it."

Armed with a single note card listing the reasons to cut capital-gains taxes, Hansen was able to corral two dozen Senators as co-sponsors within a few hours. As word spread of the bill's popularity, it soon had enough Senate cosponsors to represent a clear majority and convince the Carter White House the idea wasn't worth opposing. A tax reform that once had been considered an impossibility quickly became a reality and helped provide the rocket fuel that propelled the 1980s economic expansion.

"Much of what Cliff Hansen and Bill Steiger worked for is in jeopardy today," Mr. Bloomfield tells me. "Here's hoping we take a lesson from what helped us get out of our economic problems in the 1970s and once again consider solutions that may not at first look promising politically but do make the most sense for the economy."

Does health care reform have anything to do with capital gains taxes? You bet it does!

If you're an investor that can't bear to calculate the impact of the mounting price tag of health care reform, here's some scary math for you.

Under current law, if the President and Congress do nothing, the maximum long-term capital gains tax rate rises from 15 percent to 20 percent in 2011 but there are several ominous signs that point to a more substantial hike in the rate. Now factor in the House-passed 5.4% income surtax as part of the health care reform package, which As the Wall Street Journal recently pointed out, will hike cap gains rated even higher to a top rate of 25.4 percent in 2011--a whopping 69 percent increase!

To make matters even worse, President Obama's Budget Director Peter Orszag recently floated the idea of applying a Medicare tax to capital gains earned by higher income Americans to help pay for the health care legislation.

If economic and investment recovery wasn't hard enough, the trifecta of an automatic 15 to 20% KGs tax hike, Speaker Pelosi's 5.4% income surtax and a potential Medicare tax will hit investors like a hard punch to the gut.

RIP Senator Cliff Hansen: Capital Gains Champion

Senator Cliff Hansen (R-WY), the quiet hero of the historic Steiger-Hansen 1978 capital gains cut, passed away peacefully this week at the age of 97.


As if it were yesterday, I distinctly remember turning to the modest soft-spoken to ask him to become the lead Senate sponsor of the capital gains effort after Senator Lloyd Bentsen turned us down. Hansen said, "By Gosh, I will do it."

Working only from a handwritten 3 X 5 note card on reasons for cutting the kgs tax, he corralled 20 to 30 Senate sponsors within hours. 
 


We leaked this rare achievement to Washington Post’s Bob Samuelson, but by the time he had already gone to press, Hansen had exceeded a veto-proof 60 co-sponsors.

The rest was history. “Heroic Hansen” was hailed by the Wall Street Journal, capital gains tax rates were lowered and a new era of pro-growth tax policy was born.
 
Senator Hansen who later joined the ACCF board told me it was the highlight of his decades in the US Senate.
 


On behalf of the ACCF, thank you Senator Hansen. Your service and contributions will always be remembered.