Capgains Prospects Improve, A Bit Jude Wanniski June 23, 1998

Beltway soundings indicate House Speaker Newt Gingrich has put a 15% capital gains tax, with a June 24 starting date and a 12-month holding period, at the top of his list of things to do this year. This does not mean it will happen, as a 15% rate was in his 1994 Contract With America, but didn’t make it through because of the breakdown over the budget reconciliation. That’s going to be a problem again, but the good news is that Republicans may have gotten smarter in running Congress and the President may not be prepared to veto a tax cut that pays for itself. As The Wall Street Journal points out in its lead editorial this morning, the Joint Tax Committee has been forced to admit that it has been way off in scoring capgains receipts, and that it is likely a 15% rate with a 12-month holding period will produce more revenue than the current rate with an 18-month holding period. The plan seems to be to put taxes on hold until September, getting the appropriation bills out of the way, as they do not require a budget resolution which still does not exist. With Newt’s support, the House can muscle a tax package past the Pay-as-you-go rule in September. As we pointed out June 18, the Senate will be able to maneuver around the Paygo hurdles as well, but will invite a veto if Chairman Bill Roth of Senate Finance can’t sell his Social Security innovation to the President. If so, capgains goes down the drain with the veto. The good news is that there’s already talk of a gentlemanly deal that can be struck. Some of our sources remain dubious about a successful hatching, but Wall Street is already counting its chickens. 

JAPAN: Last week’s intervention to jack up the yen is already fading. Having advanced to 134 for a brief while, it’s trading now at 139.2, which puts the gold price at ¥41,064. The average gold price for the past 10 years is ¥44,600, which is why we have been able to note in the past that the Nikkei’s health improves noticeably as that number is approached. Most of the bad loans on the books of the Japanese banks were made in the first half of this ten-year period, when the average gold price was more like ¥60,000. Our Treasury economists are kicking around Japan for not following their advice to close down all the banks that made bad loans prior to the monetary deflation, which the Treasury economists have not yet noticed. Former Fed Governor Wayne Angell, once a supply-sider and now again a Keynesian, on Monday’s WSJournal editorial page decided that the Japanese have a mysterious savings sickness, which they could cure by cutting their national sales tax, so people will have an incentive to spend! The U.S. savings rate would balloon too, if the dollar value of their wealth in stocks and real property crashed as Japan’s has. Jack Kemp tells us he’s scheduled a meeting with Japanese officials at his Empower America offices, to discuss supply-side solutions to their stagnant economy. 

CHINA: The President will be congratulating Beijing for not devaluing the yuan, as this is part of the Democratic party line about engaging China. Engaging China is the right policy, but if we were to advise Beijing on monetary policy, we would suggest it readjust its gold/yuan rate to Y2,800 from Y2,440, announcing the move not as a devaluation, but as a correction to account for the U.S. deflation against gold. The adjustment would take the currency to 9.5 to the dollar from 8.25. Hong Kong would have to make the same adjustment, relieving the deflationary pressures there. The argument that a Chinese devaluation must be avoided is based on worries it would lead to another round of competitive devaluations in the region. This is a misreading of the problem which ignores the Fed’s overvaluation of the dollar. The precise adjustment would strengthen the internal economies of China and Hong Kong and make them buyers, not sellers, in the regional market.  No matter what Treasury says, the monetary deflation is hurting China and Japan, which diminishes the entire region.