- The Washington Times - Monday, September 10, 2001

Increasing White House consideration of a capital-gains tax cut is the latest sign that the administration knows it must have a Plan B if the economy does not begin to turn around big time by the end of this year.
President Bush was said last week to have rejected a plea from Senate Minority Leader Trent Lott and other nervous Republicans to embrace a plan for a temporary, two-year reduction in the cap-gains rate from 20 percent to 15 percent. But, in fact, Mr. Bush is actively considering just such a proposal if there is no tangible evidence in the next few months that the economy is responding to the first stage of his tax-cut plan.
A White House official told me Mr. Bush could call for a cap-gains tax cut later this year if the economy, which all but stopped growing in the second quarter, showed no significant signs of life in the fourth quarter. Or he could wait to propose such a cut in his budget proposals in January.
White House economic adviser Larry Lindsey has been pulling numbers together for the president to show what the impact of a capital-gains tax cut would have on the economy and, at the same time, on the surplus. A month ago this was not a move that was actively being discussed in the White House. Now it has been moved to the front burner. Mr. Bush, who opposed cutting the cap-gains tax in his campaign and throughout his first seven months as president, is said to be "open-minded" to the idea.
But the view from the top right now, absent of any big new economic data showing the economy heading further south, is to let the Bush tax cuts do their work. Democrats are pounding the White House daily, saying the tax cuts are not working even though the first stage of the cuts have not been fully implemented.
About half of the nearly $40 billion in rebate checks, the retroactive part of the first 1 percent cut in the income tax rates, have not been mailed out yet. And there will be another reduction in the income tax rates in January in the plan's second stage.
Early data on the impact of the rebates on consumer spending is sketchy. The White House believes they will show positive results in the third- and fourth-quarter gross domestic product. Preliminary retail sales numbers have been disappointing.
Still, cutting cap-gains rates would be a win-win move by the administration.
First, it will boost tax revenues and beef up the shrunken fiscal 2002 surplus as people sell property and stocks to take advantage of the lower capital-gains taxes they must pay.
Second, it would free up risk-taking, venture capital investment that would go into new emerging growth companies, giving the economy a major booster shot not unlike the big lift it got when Republicans cut the capital-gains rate in the mid-1990s, which helped to produce the surpluses.
Moreover, the politics of capital-gains tax cuts has shifted dramatically in the last decade as millions of ordinary working Americans have swelled the investor class. With nearly 70 percent of Americans owning their own homes and half of all workers invested in the stock market, and producing large capital gains, it is becoming a lot harder for liberal Democrats to demagogue the issue as "a tax cut for the rich."
The days when Senate Democratic Leader George Mitchell could mount a filibuster against a modest cut in the capital-gains tax rate, as he did against President Bush's bill in 1989, are all but over.
Republicans, of course, remain in the forefront of cutting, and eventually erasing, a tax that amounts to double taxation on income: once when you earn the money in the first place and then, with the cap-gains levy, on the increased value of your investment when you sell it.
However, key Democrats are increasingly supporting capital-gains tax cuts, too. Sen. Zell Miller of Georgia, a conservative and former governor who broke ranks with his party this summer to embrace Mr. Bush's tax cuts, is enthusiastically for rate cuts. So is Sen. John F. Kerry of Massachusetts, a liberal and a likely presidential candidate in 2004.
There could be, and likely will be, other Democratic votes for a cap-gains cut which Mr. Lott will offer as an amendment to the minimum-wage-increase bill.
The White House, with a full legislative plate already on its hands, is hoping that they will not have to play the capital-gains tax-cut card just yet. The administration is already planning a much broader overhaul of the tax structure in a second Bush term which would include lower cap-gains rates.
And with recent signs that the nation's manufacturing sector may be rebounding — factory orders rose in August to their highest level in nine months — Mr. Bush may not have to tackle that issue.
But that is not going to stop Mr. Lott from pushing capita-gains cuts in the Senate to demonstrate the investor class' growing political muscle in the New Economy. The only question now is, will Senate Democratic Leader Tom Daschle block a vote on it as his mentor George Mitchell once did against Mr. Bush's father?


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