- The Washington Times - Thursday, September 27, 2001

For now the country seems unified, but the "America is wrong" crowd could reappear at any time. President Bush needs to quickly revive the economy so he is not accused of causing unemployment in order to swell the ranks of military recruits for the war on terrorism.
The economy was in trouble prior to Sept. 11. Now it is in worse trouble. Airlines have laid off 100,000 employees and require taxpayer bailout. The decline in air travel will, in turn, hit hotels, car rentals, and resorts, which in turn will affect restaurants, leisure goods and so on.
Consumers are affected not only by a rise in unemployment but also by an extraordinary diminution of wealth. As of Sept. 21, the decline in the stock market since its peak in March 2000 is $7.6 trillion. Consumers feel poorer and more threatened by debts. They are unlikely to continue spending at the same rate.
There is also the important issue of psychology. The optimism with which President Reagan infused the economy has given way to fear and uncertainty. President Bush could revive American optimism the way Mr. Reagan did by implementing tax policies that show confidence in the economy.
Americans have forgotten, but prior to regaining our confidence under Mr. Reagan, the U.S. economy was in "malaise," to use President Carter's apt word. The stagflation of that time gave aid and comfort to the Soviet Union. Beset by serious economic difficulties of their own, the Soviets were cheered by our inability to increase the pressure on their crumbling system.
Mr. Reagan astonished the world when he declared that a change in economic policy would revive the U.S. economy, while nothing but the total transformation of their system could revive the Soviet economy.
Mr. Bush and Congress need to do three things: abolish the capital-gains tax, permit businesses to choose their own depreciation rules, and make the delayed income tax reduction effective immediately.
After the dramatic fall in the stock market, there are few capital gains left to be taken. Indeed, millions of investors in mutual funds and investment partnerships paid huge capital gains taxes in 2000 on investment portfolios whose values have shrunk.
The importance of abolishing the capital-gains tax is psychological. The capital-gains tax falls on the riskiest and most productive of economic activities innovation and risk-taking. Abolishing the capital-gains tax greatly reduces the cost of these critical activities.
Abolishing the tax also improves justice. The capital-gains tax is an asset tax, not an income tax. When a company becomes more profitable that is, when its profit rate rises the value of its ownership shares rise to reflect the rise in earnings. As the earnings are already taxed as corporate income and, when paid out as dividends, taxed again as personal income, it is a slap at capitalism to tax the assets that produce the double-taxed income.
There is no real gain in a "capital gain," because the replacement cost of any asset sold is the price at which it is sold. The capital-gains tax prevents an investor who wishes to change his holdings from doing so without giving up a large portion of his wealth.
A few years ago Congress finally realized this fact with regard to people's homes. The "gain" in a home in which you have lived for 25 years is illusory, because when you sell it you cannot buy it back at the original price.
The capital-gains tax on homes prevented people from downsizing their homes and relocating unless they were willing to give government a big chunk of their property's value. When Congress understood this, legislators abolished the capital-gains tax on residences for most Americans.
There is no basis on which depreciation of plant and equipment can be intelligently legislated as the values of these assets depend on earnings, product innovation, fickle consumer tastes, and the variable rate of technical change. Only the manager of a business has any idea of the value of the business' assets and the rate at which they should be depreciated. Legislated depreciation rules do nothing but raise the cost of capital and deter investments.
The income tax cut passed this year by Congress is too feeble to be worthwhile. Its economic effects in the near term are negligible, but its psychological effects are devastating. It demonstrates that concern with static revenue estimates and artificial budget balance took precedence over concern with the economy.
Mr. Bush should strike a leadership stance and stir up the "animal spirits" with red meat. Mr. Bush can succeed, like Mr. Reagan did, if he shows confidence in capitalism.

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