higher standard of living. In addition, the United States would become more competitive internationally. As both Japan and West Germany have tax codes which generally exempt capital gains from taxation, indexation would bring the United States closer to these countries' codes.
The proposed reduction in the top capital gains tax rate to 15 percent from 28 percent would have numerous beneficial effects on the economy: It will reduce the hurdle rate of return required by investors leading to higher investment and higher valuation of the current profit (capital gains) stream. This will tend to increase the value of stocks as well as the tax base. In the long run, it will increase capital gains tax revenues. However, under Gramm-Rudman-Hollings, any static revenue losses would have to be made up. Though the move to reduce the capital gains tax will be desirable for the U.S. economy, a potentially superior alternative is available: Indexing the capital gains tax code and adopting a domestic price rule that reduces the inflation rate will have an even stronger beneficial impact on the U.S. economy.