The Right Capital Gains Tax Cut

The whole debate about cutting capital-gains taxes at this time is surreal. The stock market is at a record high, growth is running at a 3.4% clip, and unemployment is down to about 5%. The initial public offering market is booming, and megamergers are being financed with ease. Who in this economy is having trouble raising capital? Where is the shortage?

But no matter. A capital-gains tax cut is on its way, thanks to the alignment of political stars in Washington. So let's at least make the right cut. First, don't tinker. Just cut the tax broadly and simply. President Clinton and some members of Congress propose to target capital-gains tax cuts on houses, farms, small businesses, and a whole host of other assets. The goal of cutting capital-gains taxes should be to promote overall growth. Targeting cuts rewards different political constituencies and distorts investment decisions. It's good politics but bad economics.

Second, tie any tax cut to long-term asset growth. Folks who are willing to hold onto their stocks for several years and provide steady capital for investment should get a bigger cap-gains tax cut than people who hold stocks for shorter periods.

Third, weigh any tax cut against the need to balance the budget, which would do more than anything else to lower interest rates and provide capital. With stocks so high, a cap-gains tax cut would, at first, send billions into the Treasury's coffers. But over time, a cut in cap-gains taxes would probably cost the government serious money.

If Washington insists on a cap-gains tax cut, it should make it broad, simple, and focused on growth, not politics.