Cut the Capital-Gains Tax to Get Money Flowing and Create Jobs : Economy: Everybody would benefit, not just the rich, if home equity, for example, could be used to start new small businesses.

Cutting the capital-gains tax is the best way to unlock a flood of cash and create private-sector jobs, increase real wages and reduce the federal deficit.

This is critical for California because at 8.7%, statewide unemployment is the highest in the nation and 800,000 jobs have vanished in five years. The 60 largest aerospace firms in Southern California have lost 150,000 jobs alone, with 100,000 of those high-paying, high-skill jobs disappearing in Los Angeles Country.

Many laid-off aerospace workers have substantial equity in their homes that could be used to start new businesses. But that equity is “locked in” because of the capital-gains tax. After discounting for inflation, the real capital-gains tax rate facing California homeowners may be as high as 100%. To unlock this equity and create new jobs and new tax revenue, Congress should immediately allow homeowners to roll over any capital gain that is used to start a new business.

Congress should then dramatically cut the capital-gains tax rate across-the-board. In addition to increasing investment and economic growth, capital-gains tax reduction will increase worker wages and thus revenue to state and local governments. Most important to the Southern California aerospace workers who are struggling to adjust to a new era of lower defense spending, a capital-gains tax cut will help by increasing capital investments that pair new factories with this pool of highly skilled workers.

If the goal of economic policy is to create jobs and increase living standards, a zero capital-gains tax would be best. A recent study by the Institute for Policy Innovation predicts impressive results in job creation, capital formation, economic activity, private-sector wages and government revenue. A zero capital gains would result, in the next six years, in an additional growth of $1.5 trillion in the total output of the economy’s goods and services, 1.1 million new private-sector jobs, an $1,884 increase in average annual wages for all workers and $25 billion in additional tax revenue.

Completely eliminating the tax on capital gains might sound far-fetched, but it’s not a new idea. Back in 1978, when stagflation forced creative thinking, Digital Resources Inc. analyzed a zero capital-gains tax. DRI predicted that eliminating capital-gains taxes would boost total output, including exports and imports, by $200 billion, increase capital formation by $81 billion and create 3 million new jobs. Just as important from a 1990s perspective, DRI predicted that a zero capital-gains tax would increase net tax revenue by $38 billion over five years.

To achieve deficit reduction and job creation simultaneously, the best approach is to reduce the capital-gains tax rate to 15% and index the rate to inflation. The IPI study projects that this would create nearly 1 million new jobs, increase domestic goods and services by $1.3 trillion, boost average wages by $1,500, create $2.7 trillion in new capital and provide $211 billion in additional federal revenues. No other plan can promise comparable job-creation and deficit-reduction results.

Unfortunately, as the White House and Capitol Hill begin tackling a new budget, job creation is not their top priority. That’s because lower unemployment rates nationally (never mind that job numbers are much worse than just five years ago) have created a sense of complacency and because fiscal policy is gridlocked by a perceived trade-off between job creation and adding to the federal deficit.

Conventional wisdom in Washington is that creating jobs will add to the deficit and that cutting the deficit will cost jobs. President Clinton’s first-year economic proposals illustrate his slavish belief in this mistaken notion. His $16-billion “stimulus” bill was nothing more than a deficit-financed make-work public-sector jobs plan. At the same time, the President pushed through a “deficit-reduction” plan that contains the largest tax increase in history and will hamper job creation for years.

These proposals neither solve the problems of high federal deficits and slow job creation nor respond to the needs of California. Unfortunately, two things stand in the way of the win-win policy of a capital-gains tax cut. First, government budget scorekeepers will incorrectly claim that a capital-gains tax cut will add to the deficit. Second, capital-gains tax policy is a rhetorical weapon of class warfare that liberal Democrats will not easily give up.

Americans need to be told the truth: job creation and deficit reduction are compatible, and the proof lies just a capital-gains tax cut away.