- The Washington Times - Wednesday, January 8, 2003

Although recent economic indicators demonstrate that the U.S. is undergoing a slow recovery from the downturn of 2000, there are troubling signs as we head into 2003. Worker productivity is up, but overall growth is at a minimum and unemployment is at a nine-year high. The prospects of a dreaded "jobless recovery" are all too possible, which is not an acceptable outcome for hundreds of thousands of unemployed workers and their families. Tens of millions of middle-income American investors, the new Investor Class, expect better as well.
The President has made restoring strong economic growth and re-starting the U.S. job creation engine his top domestic priority, and we will see his plan in the coming weeks. Democrats learned in November that the Investor Class demands more than partisan criticism on the economy. They will be for something on growth as well. As policymakers on all sides develop their plans, I recommend they take a page from the book of our nation's retailers looking to boost sales around the holiday season. We need to boost investment and job creation, so now is the time for a "10 Percent Off Sale" on new investment.
The most effective and targeted way to boost capital investment and bring individual investors back into the markets is to create a two-year window in which assets purchased during that window, a two-year investment "sale" so to speak, will receive a reduced capital-gains tax rate in the future. In other words, this is not a capital-gains tax cut to encourage the selling of investments currently held, it is a reduced capital-gains rate in the future for new investment, creating an incentive to invest now. Specifically, I propose a cut in individual rates from 20 percent to 10 percent on new investments purchased within the 2-year window, and from 35 percent to 20 percent for corporations during that time period. I would also apply a one-year holding period for eligibility, so you cannot buy one day and sell the next. Finally, I would reduce the effective rate on Qualified Small Business Stock, which would retain a 5-year holding period, to 7 percent.
This highly targeted proposal is largely immune from some of the primary criticisms of other tax reform proposals being currently floated. The "cost" in terms of tax revenue loss as estimated by Washington's cabal of budget scorekeepers would be negligible compared to the benefits. In fact, using current "static scoring," the first-year costs would be zero, given the one-year holding period and its targeting of lower rates to newly purchased, as opposed to already held, assets. Furthermore, history offers plenty of evidence that the revenue impact in "out years" would be more than offset by the positive budget impact of a stronger economy, increased equity values, and burgeoning federal tax receipts.
Some critics of a broad capital-gains tax reduction have made the claim that cutting this tax rate would encourage investors to sell assets to take advantage of the tax cut. They claim this would actually drive down markets, the last thing investors want to see. That argument fails to take into account the fact that lowering the capital gains "tax on investment" would increase the demand side of the investment equation. But, this proposal takes that whole argument off the table. The forward -looking nature of this investment window is a strong incentive to buy. Rather than downward pressure on the market, we would see momentum for a rising market and increased wealth direct relief for individual investors who have weathered an $8 trillion drop in the stock market.
Importantly, this targeted proposal includes a special benefit for the entrepreneurial small firms that are an "engine of growth" among American businesses. In my home state of California, many of the corporate cornerstones of the Information Age started in the garages of pioneers like Steve Jobs and David Packard. They relied then on access to capital to turn great technology ideas into great high-tech businesses, and early venture funding is just as critical today. This is especially true for minority- and female-owned firms that are the fastest-growing segment of new small businesses.
Our growth strategy to avoid a jobless recovery must deal with consumers and investors. We are fortunate that in America they are increasingly the same people. Approximately 50% of Americans own some type of financial asset, and just as the face of America's small businesses has changed, so has the face of today's investor. This "Investor Class" is made up of young families, small business owners, and knowledge industry workers a veritable cross section of America. Just as they shop for bargains at the post-holiday sales, they will step up and give the economy a critical investment boost if we put in place a two-year investment sale.

Rep. David Dreier, California Republican, is chairman of the House Rules Committee and co-chair of the Zero Capital Gains Tax Caucus.

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