Breakthrough on Indexing Capgains
Jude Wanniski
October 14, 1996


At an Anaheim meeting today of the California League of Cities, Jack Kemp is scheduled to announce a decision by Bob Dole to promise that on the first day of his presidency, he will issue an executive order that will instruct the Treasury Department to index capital gains for tax purposes, retroactively and prospectively. It is a major victory for Kemp, who wrote about the idea in a June 18 Wall Street Journal op-ed piece, several weeks before Dole chose him as his running mate. Kemp and his economic advisors at Empower America have been working with the Dole team since the San Diego convention on the feasibility of the idea. The last hurdles were cleared when Dole’s concerns about the constitutional propriety of sidestepping the Congress with a regulatory order were satisfied. That issue was resolved through a letter from Charles Cooper, a Washington lawyer who served as Assistant Attorney General in the Reagan administration, who said there never has been a question of the President’s constitutional authority to define the word “cost” in the tax regulations. Cooper headed a legal team that attempted to persuade President Bush to issue such an executive order in 1992, when it became clear that Bush’s campaign promise of 1988 to index capital gains by statute was not going to be achieved in a Democratic Congress. By making the announcement today, Kemp enables the idea to sink in through the state of California, which contains at least $1 trillion of the $7 trillion of unrealized capital gains in the nation that are purely the result of inflation. At a maximum unlocking of capital, this of course relieves every property owner and small businessman from the Mexican border to the Oregon border of tax liabilities on the sale of that property.

The idea has been forcefully pushed by Ted Forstmann of Forstmann, Little & Co., the founder of Empower America and a likely choice for Treasury Secretary in a Dole administration. It also has been argued by Wayne Angell, the former Fed governor, who had been a Kansas farmer and banker and is a 30-year friend of Dole’s. More than 90% of the inflated gains in the nation are tied up in real property. Forstmann argues that the greatest benefits would flow to the smallest businessmen, farmers and ranchers. Only a tiny fraction, less than 5%, would involve antique stock. If the order were issued -- and Kemp says he believes President Clinton could do it today -- it only could have the effect of dramatically lifting the value of all real and financial assets in the country. By bringing it up today, my assumption is that the Dole people want it discussed and explained for the next two days, prior to the next Clinton/Dole debate in San Diego. The California Field Poll shows Clinton’s 20-point lead over Dole having narrowed to 10 points. The argument that Californians would have a tremendous stake in a Dole presidency as a result of the promise of this executive order may have contributed to the decision to move forward now.

The news of Kemp’s speech should be on the wires this afternoon. We got word of the green light this morning. It is my belief that once the idea is discussed, the realization that it is the right thing to do -- over and above its being the economic and political thing to do -- will force the regulatory change one way or another. In other words, it will no longer depend on the outcome of the election. Even if re-elected, Clinton will be under tremendous pressure to do it. For those worried that Kemp has been trimming his views to accommodate Dole, the Dole decision is the first clear sign that this is a two-way partnership.