Robert Rubin, the most widely celebrated secretary of the Treasury ever, left office Friday insistent that cutting the capital gains tax rate is a venture in futility. But as Rubin returned to New York, a mainstream economic analysis showed he is wrong.
The study by Standard & Poor's DRI service confounds the Clinton administration bias that survives Rubin's departure. It found that the bipartisan 1997 Hatch-Lieberman cut in the capital gains rate from 28 percent to 20 percent lowered capital costs for new investment, promoted start-up businesses and entrepreneurism, helped elevate stock prices and made life better for the ordinary American. What's more, the report revealed the Laffer Curve in action -- with revenues going up, not down.
Such ammunition is needed as the 1999 tax battle begins on Capitol Hill. The plan released by House Ways and Means Committee Chairman Bill Archer calls for a capital gains cut retroactive to July 1 -- perhaps down to 10 percent. But it faces a less than enthusiastic reception by Senate Finance Committee Chairman William Roth and by special interest groups seeking to carve more favors out of the Internal Revenue code.
The biggest obstacle is the Clinton administration. Rubin reiterated his opposition May 29, contending that another capital gains reduction "would contribute very little to savings, very little to investment and very little to growth." Rubin earned his millions in Wall Street as a world-class arbitrageur, not as an entrepreneur.
I checked with Rubin's protege, National Economic Director Gene Sperling, at a breakfast with reporters last Wednesday. No change. He said, "We have no intention of supporting a new capital gains tax cut."
Nevertheless, Sperling added, "We've never been religiously for or religiously against" capital gains tax reductions -- implying that adherents comprise a cult. The American Council for Capital Formation would be the Vatican of this religion, and its president, Mark Bloomfield, its pope. But DRI and its chief economist David Wyss are nonideological agnostics. That's the importance of these findings by Wyss:
The 1997 cut reduced net capital cost by about 3 percent. Fixed investment will go up 1.5 percent. The result: a productivity increase of 0.4 percent over 10 years.
The capital gains cut will raise household annual income by $309 and the average worker's income by $250 by 2007, thanks to increased productivity.
"The capital gains tax cut should encourage more people to become entrepreneurs" -- especially in high-tech enterprises.
The 25 percent increase in stock prices since 1997 can be traced partially to lower taxes on realized capital gains.
"The stronger growth in the economy adds to federal revenues over the long run." This rejects the Clinton Treasury's analysis of subtracting from revenue the difference between the old and new capital gains rates. Besides the big short-run revenue gain caused by the higher turnover of assets, there is a long-term impact: "The stronger economy and resulting higher personal and corporate incomes will raise receipts."
The Treasury's stubborn refusal to appreciate the dynamic effect of capital gains cuts did not begin with Rubin. In 1978 Senate Finance Committee Chairman Russell B. Long wrestled with the Carter administration's Treasury. He unsuccessfully sought to convert Assistant Secretary Donald Lubick with a Louisiana hunting analogy for estimating capital gains tax revenue: Aim at the duck, and you're sure to miss; aim ahead of the duck, and you might hit him. Nearly 21 years later, Lubick is back at the same job with the same ideas.
That makes the fight an uphill climb, particularly when Sen. Roth is trying to craft a bill that he is sure the president will not veto. But now Republican Sen. Orrin Hatch and Democratic Sen. Joseph Lieberman, urged to sponsor another capital gains cut, have in the DRI report better ammunition than a duck-hunting parable. The zero capital gains tax rate long advocated by Federal Reserve Chairman Alan Greenspan is the ultimate goal, but a reduction to even 15 percent would make a good economy even better, no matter what the departing secretary of the Treasury says.