Senator Bob Packwood, the ranking Republican on Senate Finance, has teamed with Senator David Boren, Democrat of Oklahoma, to write yet another version of a capital gains tax cut. This one provides for a 5% exclusion each year up to a maximum of 35%, which means the effective tax rate would be 18.2%. As you may have seen, Packwood told The Wall Street Journal this morning that chances of a capital gains cut being enacted this year are 10-to-l. The problem is that Packwood can be right on the odds if the version that winds up on the President's desk is watered down sufficiently in its growth effects. The Packwood-Boren version is watered down plenty. It just might be better than nothing. But it leans heavily toward blue chips, which are held a long time, and discourages acquisitions of new issues, which tend to boom or bust in a relative hurry.
The measure, which would apply to assets sold after October 1, would indeed unlock a lot of revenues at all levels of government, the low rate applying to assets held for the past seven years or more. But it doesn't have much of an entrepreneurial kick in it, building into the future a constipation of high-risk capital. The White House is giving its blessing to the bill, as it fits with Treasury Secretary Nick Brady's notion that holding an asset a long time is a good thing to do. It essentially gives its biggest benefits to old money, the aristocracy, the coupon clippers, those who are already rich, and discourages capital flows to up-and-comers. Insofar as it locks in investors who prefer to wait for the tax-cut progressions to occur, it dries up market liquidity, eliminating armies of buyers and sellers at a stroke.
The partners at the Wall Street firm of Gilder & Gagnon looked on the proposal this morning with disbelief, signing a joint letter to Packwood, Boren and Brady:
We are stockbrokers whose clients are small individual investors seeking to build capital over the long term. By rewarding capital gains in a progressive manner...you discourage investment in risk-taking enterprises. If it takes several years to earn the most favorable treatment, wearing your investment hat, would you consider a high-tech investment? If the cycle were to change suddenly or new technology were coming on, you'd have to sell prematurely. Because these are typical events in the high-tech world, you'd pass on the technology group. Instead, you'd consider a slow, but much more sure issue like a utility or a retailer, a stock you could hold with confidence for five or more years.
So you encourage investment in more mature industries and discourage investment in the growth areas. Is this what you really want to do? We urge you to adopt the President's straightforward cut to 15% with a maximum holding period benefit of one or two years.
A positive view is that the administration strategy is to get the capgains bill started in the Senate, by attaching it to another revenue measure. The Packwood-Boren version might be just bad enough to attract liberal Democrats! In the House, where the entrepreneurial forces are much stronger than in the aristocratic Senate, it's much more likely the holding period would be whacked down. The chief problem, though, is that the administration still does not seem to have a winning strategy for breaking through the procedural gridlock in the Senate. "We're going to push to get the 60 votes we need," is the best a senior White House official could tell me this morning. We hear the President's chief economic advisor is now saying the odds are fifty-fifty, the same that House Speaker Tom Foley, an opponent, is suggesting.