- The Washington Times - Tuesday, September 11, 2001

If there is any bright side to the distressing August unemployment numbers reported Friday by the Department of Labor and last week's cascading stock market, it is that the White House and Congress might soon agree to reduce the capital gains tax as a growth-promoting measure.
The numbers last week were truly dismal. Based on its monthly household survey, the Labor Department reported that "total employment dropped by about 1 million in August," while "the number of unemployed persons increased by more than half a million to nearly 7 million in August." Another 400,000 persons simply left the labor force, hardly an indication of confidence in the economy. The unemployment rate sharply jumped from 4.5 percent to 4.9 percent in August. As for the U.S. stock market, the broad-based S&P; 500 stock index dropped by 7 percent last week. The S&P; 500 has dropped 18 percent since the first of the year, despite the fact that the Fed has been aggressively reducing short-term interest rates over the same period. Historically, the U.S. stock market has acted as a leading indicator, beginning its rise months before a lagging economy turns around. If the past is any guide, insofar as the near term is concerned, there doesn't appear to be much light at the end of the economy's dark tunnel.
Clearly, while the Fed's rate cuts and the well-timed tax relief rebate checks will positively affect the economy, more needs to be done now. A reduction in the capital gains tax from a top rate of 20 percent to 15 percent, as the congressional Republican leadership is proposing, is a particularly good idea for three important reasons. First, since the early 1960s, every time Congress and the White House have cut the capital gains tax rate which is applied to the profits earned on the sale of assets such as stocks, bonds and real estate total capital gains tax revenues have increased. Second, reducing the capital gains tax rate encourages investors to reallocate their capital to those economic sectors that promise the most growth. Third, a lower capital gains tax makes investments in stocks more attractive than they otherwise would be, thus acting as a brake on the stock market's slide.
While Republican Senate Minority Leader Trent Lott and House Majority Leader Dennis Hastert are taking the lead in reducing the capital gains rate, the idea has bipartisan appeal. Indeed, in May, as the Senate considered tax relief legislation, seven Democratic senators Joe Lieberman, Charles Schumer, Robert Torricelli, Ron Wyden, Evan Bayh, Zell Miller and Max Cleland actually voted for an amendment sponsored by Republican Judd Gregg to reduce the top capital gains rate from 20 percent to 15 percent. Other Democrats, including Max Baucus, Dianne Feinstein and Ben Nelson, have also looked favorably upon such a reduction, as has John Kerry recently.
President Bush, who did not immediately embrace Mr. Lott's proposal when it was made at the White House the day after Labor Day, indicated he might have second thoughts Friday afternoon, following the unemployment report and the stock market slide. The president can demonstrate his concern by endorsing the bipartisan, growth-promoting policy of reducing the capital gains tax.


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