A widely discussed topic around kitchen tables across America today is how people who worked hard their whole lives are going to rebuild their nest eggs that were wiped out by the economic tsunami. It's going to take a lot to restore confidence (and maybe an innovative government initiative) for Americans who have seen their 401(k)s reduced to 201{k}s and even 101(k)s--as much as $603 billion lost according to the Employee Benefit Research Institute in Washington. That only scratches the surface of the $2 trillion lost in overall retirement savings.
Rightly, our policymakers to date have focused on trying to re-establish the trust of Americans in the essential resilience of the U.S. economy, rebuild our financial institutions so that credit can again fuel economic growth and use monetary and fiscal policy to get us out of a deep recession. Now, how about considering a powerful rifle shot initiative to "Gimme Back My Nest Egg" for millions of Americans?
These are extraordinary times that call for innovative solutions, and Americans need a novel approach to help rebuild their nest eggs. Perhaps it is time for a new look at the capital gains tax. But here's the funny thing: our new look can come from an old presidency.
The concept is a fairly simple one. Rather than applying a reduced capital gains tax rate to the sale of an investment (currently at 15 percent), why not apply the tax break based on the purchase date of the stock? Under this plan, taxpayers who purchase a capital asset within one year of the date Congress initiates the legislation would pay a capital gains tax under a new sliding scale tax rate similar to that proposed by President Franklin Delano Roosevelt. If an asset was held for one year, any gain on the sale would be subject to half the normal capital gains tax rate (a maximum 7.5 percent under current law or 10 percent under President Obama's proposed top 20 percent tax. If an asset was held more than five years, there would be no tax on the gain. The capital gains tax on equities or other capital assets in tax-preferred accounts (401(k)s and IRAs, for example), would also be less on withdrawal than the ordinary tax rate that would otherwise apply. Remember, Americans' nest eggs are located in 401ks, IRAs, and similar accounts as well as in banks, insurance companies, brokerage accounts and other forms of ownership.
This approach could provide just the incentive needed to motivate Americans to move their dollars from bank accounts, money markets, or under mattresses back to the stock market and other investments. "Gimme Back My Nest Egg" could provide strong encouragement to buy equities again, thereby supporting the stock market and restoring retirement security. An FDR-type sliding scale would also be an incentive for investment stability, rather than short-term speculation. It is not a magic bullet, but it could be a powerful element in economic recovery.
During his campaign, President Obama mentioned that he would eliminate the capital gains tax for certain small businesses. He should be congratulated for acknowledging that the capital gains tax has a powerful impact on entrepreneurship, innovation, and job creation. Newly elected Congressman Jared Polis (D-CO), who has a savvy business background as the founder of bluemountain.com, recently floated waiving the future capital-gains tax on all investments in the automobile industry. If the capital gains tax tool works for job-creating small businesses and as a novel approach to saving the automobile industry, why not try an innovative, entrepreneurial and powerful approach to restoring retirement security?
Critics will complain: "It rewards the Madoffs of the world." No, it would do just the opposite. It would aid his victims by helping restore their nest eggs, increasing the value of their retirement assets, raising their confidence in the stock markets, and building a stronger economy. While we are talking about "fairness," the current $3,000 capital loss offset against ordinary income put into the law decades ago should be raised to $10,000 to take into account inflation and an extra pool of money to invest in the "Gimme Back My Nest Egg" initiative.
Fortunately, a '30s-style Depression isn't likely, but the events of the past year badly shocked American capitalism and dramatically changed the political landscape. A look back at an FDR-style capital gains tax initiative--embraced by a forward-looking administration and Congress--might produce a welcome change at kitchen tables and firesides across the country.
Mark Bloomfield is president and CEO of the American Council for Capital Formation.
