Investment is what fuels economic growth; demagoguery is what fuels class-warfare politics.
Washington knows this. So why is the Senate leaving an important investment incentive out of a recent tax plan? Demagoguery. The cry of “tax breaks for the rich” has been alleged so many times that some people are beginning to believe it.
It’s not that the Senate refuses to cut taxes. Both chambers in Congress are putting forward more tax cuts three years before the current cuts expire. However, the House tax writing committee has proposed a package that would extend the current tax cut on stock dividends and capital gains that President Bush insisted on in his first term. The Senate, by contrast, doesn’t extend the cuts on capital gains and dividends.
A continual trimming of the capital gains tax is critical to maximizing economic investment, and therefore economic growth. When the rate was dropped to 20% from 28% in 1997, for example, the economic response was a gush of investment, much of it in venture capital, job creation and a strong market rally.
Economists who don’t have a partisan agenda will admit that virtually every capital gains tax cut over the past four decades has stimulated economic growth. The Bush capital gains tax cuts, combined with other tax cuts, have been as effective in strengthening the economy as those 1997 cuts. Without them, the setbacks of 9-11, the recent natural disasters, and the slipping economy of 2000 would have been lethal.
Instead, the economy is strong today, growing at well over 3%, adding jobs and increasing productivity.That’s in large part because a majority in Congress for several years refused to bend to class-warfare demagoguery.
The conference committee should include an extension of the cap gains tax cut and give the Senate a second chance to show it understands economics.