THE House just passed a tax bill that includes a potentially ground-breaking reduction in the capital-gains tax. But since much of that bill may change by final passage of any tax legislation, the survival of this tax cut is still in doubt.
As the debate continues, it will be interesting to see where Democrats from large cities line up. We constantly hear the tired rhetoric that a capital-gains tax cut is a break for the rich. What we do not hear is that such a cut will help cities across the country balance chronically unbalanced budgets, while providing thousands of jobs as well.
For example, New York City faces long-term structural deficits. Even after heroic work by Mayor Rudolph Giuliani, with the assistance of the City Council, we still face recurring deficits of $2 billion or more for years to come. In fact, after this year's city budget passed in June, it quickly became unbalanced -- in part because taxes from the securities industry were lower than expected.
A Federal capital-gains cut would stimulate the securities industry in New York City and any city with a securities exchange or a significant percentage of residents employed in the securities industry. Money locked into inefficient, uneconomic investments would be freed up because lowering the capital-gains tax makes it more economical to liquidate unperforming assets.
Each time an investor buys or sells securities, wealth is created and capital is moved to more economically efficient uses. This is the macroeconomic argument for a capital-gains tax cut. Just as important, though, as these transactions occur, traders make a profit, brokers make a commission, and secretaries, computer systems managers and back-office operations get paid. Better pay makes for higher income tax to the city.
And the benefit to urban securities markets is not, in municipal budget parlance, merely a ''one-shot.'' After the capital-gains dam breaks, activity will slow down, because the shake-out of bad investments will end. However, even after the economic logjam is broken by people realizing long-term gains and losses all at once, the securities markets will continue to function more quickly and efficiently because the inherent inefficiency and drag on liquidity imposed by the capital-gains tax will be gone. A more active, efficient, and liquid market translates into continued payment of budget-balancing income taxes.
Nor is this argument limited to securities. The finance, insurance, and real estate industries (FIRE industries) are among the most important revenue-producing businesses in New York City. Insurance companies have tremendous investments in the securities markets, and real estate. And the real estate industry would benefit from a decrease in the transaction costs that keep it from functioning more freely. Indeed, Lawrence Kudlow estimated more than four years ago that a cut in the capital-gains tax from 28 percent to 20 percent would have created an infusion of $500 million to New York in 1991 dollars -- $600 million today. Stephen Kagann, former deputy comptroller under Elizabeth Holtzman, says a cut from 28 percent to 15 percent would create 60,000 jobs in New York City.
Finally, a lower capital-gains tax will make it easier not just for companies to issue debt or stock, but for municipalities to issue bonds. The less the potential capital appreciation will be taxed, the more easily cities and other governmental entities can sell the billions of dollars in debt they issue every year -- saving municipalities hundreds of millions in interest.
At a time when cities like New York and Los Angeles face terrible fiscal constraints, we must find new sources for revenue that will not drive jobs away from cities. We must continue to provide core services like transportation and police, yes; but we must also retain our commitment to child care, to people with AIDS, to dealing with homelessness, and to creating jobs in the private sector.
Unfortunately, the very politicians who make much of their commitment to addressing these social problems often oppose creating new ways to increase revenues if someone profits.
The next time you hear a city politician oppose the capital-gains tax cut, ask him to go to his local broker's office and tell the back office worker that this cut would only benefit the rich. Then ask him to explain to his local mayor that he is all for helping balance the budget -- but not if somebody will make money and create jobs at the same time.