Monetary Policy, Taxation, and International Investment Strategy

By Victor A. Canto; Arthur B. Laffer | Go to book overview

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.


CONCLUSIONS

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.


NOTES
1.
Michael R. Darby, Robert Gillingham, and John S. Greenlees, "The Direct Revenue Effects of Capital Gains Taxation: A Reconsideration of the Time-Series Evidence," Treasury Bulletin, Spring 1988. The two studies cited by Darby are: Joseph Minarik, "Raising Federal Revenues through a Reduction in the Capital Gains Tax," Statement before the Ad Hoc Committee on the Taxation of Capital Gains, February 2, 1988; and Congressional Budget Office, "How Capital Gains Tax Rates Affect Revenues: The Historical Evidence."
2.
Truman A. Clark, "When to Realize Capital Gains," A. B. Laffer Associates, September 26, 1986.
3.
Dan Walters, "Which One Is Reaching for Taxes in Budget Pinch?" Wall Street Journal, June 2, 1988, p. 22.
4.
The increase in the legislated capital gains tax rate to 28 percent from 20 percent will increase the effective tax rate to 84 percent. Clearly, this will induce some asset liquidation, but not a massive sell-off. A rise in inflationary expectations will further increase the effective tax rate. At 6 percent expected inflation, an effective marginal tax rate in excess of 100 percent is reached. This suggests that the combination of an increase in the legislated capital gains tax rate and a rise in inflationary expectations could induce a massive sell-off as well as a massive correction in equity values.
5.
Arthur B. Laffer, "Reagan's Economic Proposals within a Supply-Side Framework," A. B. Laffer Associates, March 13, 1981; Arthur B. Laffer, "Economic and Investment Observations: Capital Gains Tax Rate Reduction," in Arthur B. Laffer and Jan Seymour , eds., The Economics of the Tax Revolt ( New York: Harcourt, Brace, Jovanovich, 1979), pp. 95-105.
6.
See Chapter 10; Victor A. Canto and Arthur B. Laffer, "Capital Gains," A. B. Laffer Associates, May 4, 1989.

-144-

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Monetary Policy, Taxation, and International Investment Strategy
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Figures ix
  • Tables xiii
  • Introduction xix
  • Note xlii
  • PART ONE MONETARY POLICY 1
  • 1: Capacity Utilization and Inflation 3
  • 2: World Money and U.S. Inflation 13
  • 3: Alternative Monetary Theories of Inflation 25
  • 5: The Quality of Inflation Indicators 80
  • 6: The Yield Curve 87
  • PART TWO - FISCAL POLICY 93
  • 7 - Bush's Economic Agenda within a Supply-Side Framework 111
  • 8: Tax Amnesty: The Missing Link 113
  • 9: Fifteen Percent is Fine, but Indexing is Divine 123
  • Notes 144
  • 10: Stylized Facts and Fallacies of Capital Gains Tax Rate Reductions and Indexa tion 147
  • 11: Friday the 13th 157
  • 12: Debt and Taxes Are the Only Certainty 165
  • Note 173
  • 13: Borrowed Prosperity 175
  • Notes 187
  • 14: The Savings Monster 189
  • 15: Are We Climbing the Wall of Resistance toward National Health Insurance? 209
  • PART THREE INTERNATIONAL ECONOMIC ISSUES 219
  • 16: Tax Rate Reductions and Foreign Exchange Rates 221
  • Notes 230
  • 17: The Trade Balance 233
  • 18: National Paedomorphosis 241
  • PART FOUR PORTFOLIO STRATEGIES 255
  • 19: Part I: The Legend 257
  • Notes 267
  • 20: Part II 269
  • 21: The Small-Cap and State Competitive Environment 283
  • 22: International Stock Returns and Real Exchange Rates 301
  • Notes 320
  • Index 321
  • About the Contributors 327
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