The following was printed in the August 31,
1992 issue of the Wall Street Journal. I apologize for the extraordinary
step of posting it here in this manner; but I was unable to locate it on the
Journal's website, even under the pay-per-use
service. This is important information, which I hope the Journal itself
will see fit to republish as soon as possible.
From the Wall Street Journal Editorial Page
- August 31, 1992
REVIEW & OUTLOOK
An Act of Leadership
The biggest handicap George Bush faces in selling his program to spark a limp recovery is the nearly universal
perception that he talks a good game on tax cuts but can never get anything done. Now, thanks to some outside legal
advice, he has a new opportunity for a bold stroke of leadership that would actually help the economy.
The stroke would be directing the Treasury to issue an order redefining the term "cost" in the Tax Code to mean cost
in current dollars rather than in historical dollars. The step is eminently sensible on its face; incomes come in current
dollars and other relevant numbers ought to be measured by the same yardstick.
"Indexing" historical cost to current dollars would immediately provide more generous tax treatment of capital gains
and depreciation. The economic effect would be to increase incentives for creating and redeploying capital, and would
especially help the kind of start-up businesses we now lack. With an improved outlook, some of the effect might be
visible quickly, even before the November election.
The political effect would be to use the power of the Presidency to confront Congress, where the Democratic leadership has made the capital gains Issue
a totem of defeating the President, if not a wooden shoe deliberately intended to clog the economic machinery before
the election. If you buy a home or a financial asset for $100,000, hold it during 20% inflation, and sell it for
no one seriously believes you should pay tax on $20,000. In 1989, indeed, capital gains relief got a majority vote in
both Houses of Congress, and was stopped only by a filibuster led by Senate Majority Leader George Mitchell. The
current economic slowdown started about then.
When the idea of indexing by administrative order was first suggested by supply-side economist Paul Craig Roberts in
January, it was dismissed as a harebrained idea. "If we could do it we would," Treasury Secretary Nicholas Brady said
last month. "We have had no competent legal advice that you could do it." That is, when the Treasury trotted the
proposal around to its lawyers, they said "cost" has meant historical cost since the code was written in 1918, and by
dint of sheer longevity only Congress could change it now. Beside, it would be too much trouble. Case closed.
Now comes Charles Cooper, hired to study the legal issue by the National Taxpayers Union Foundation and the
Chamber of Commerce where chief economist Larry Hunter has been a tireless
champion of capital gains reform. Mr. Cooper, who as a
Justice Department official wrote the brief rejecting arguments that the President has an inherent line-item veto,
scarcely has a reputation for wild-eyed legal theories. He said that when he was hired he had doubts about this
presidential power as well. After studying the issue, he's concluded that Mr. Roberts was right to begin with. An order
redefining "cost" is not only within the President's discretion but would be upheld by the courts if tested.
The legal arguments are sketched in the article nearby: The word "cost" begs definition; the statute-writers knew how
to say "purchase price" if that's what they intended. The executive had the power to define cost in current dollars in
1918, and sheer passage of time does not extinguish this discretion. Much has changed, indeed, such as the 1971
actions severing the dollar's link with gold, and the 1986 decision to end preferential capital gains rates partly intended
to offset the impact of inflation. The Supreme Court has in fact upheld the executive's right to change previous
executive interpretations; a President, after all, has a mandate from voters.
In purely practical terms the President's hand would be even stronger. It's not clear that anyone would have legal
standing to mount a court challenge. Congress could, of course, overturn the ruling through legislation, but this seems
unlikely and could be vetoed. Intellectually, there simply are no arguments for taxing citizens on the inflation caused by
the government. Congress has already indexed tax brackets to stop this; we'd like to see it subtract inflation from
interest rates before taxing what you earn on your savings account. But capital gains represent the only instance
where, if you wait long enough to cash in, your tax may be more than 100%.
The capital gains rate is not the only thing slowing the economy, of course. It is merely part of a generalized prejudice
against risk, enforced by back-seat bank examiners and an epidemic of regulatory lawsuits. But capital gains relief
would be a psychological boost, a token that the 1989 Mitchell filibuster, the 1990
budget deal tax increases and the
like don't represent a new era, with a creeping reversal of the tax policies that helped create more than 18 million
new jobs during the 1980s expansion.
Most important of all, if George Bush demonstrated some boldness, taking some risk of criticism in
exercising his powers, it would suggest that he has an economic program after
all, that he not merely talks about tax cuts, but really believes in them.
This page was updated:
Sunday, January 29, 2012