E!! The True Conservative Story™

The following letter was sent yesterday to Treasury Secretary Henry Paulson:

September 24, 2008

The Honorable Henry Paulson
Department of the Treasury
1500 Pennsylvania Ave., NW
Washington, DC 20220

Dear Secretary Paulson:

As you continue to craft a financial stabilization plan with Congressional policymakers, I wanted to once again urge you to consider a move that could be executed unilaterally by the Treasury Department: indexing the basis of capital assets to inflation for purposes of calculating gain or loss.

There is a body of legal opinion which holds that the Treasury Department has the power to define “cost basis” when taxpayers calculate capital gain or loss. To date, Treasury secretaries of both parties have chosen to define “cost” as nominal purchase price.

This creates a situation whereby an asset held for many years and later sold may generate a capital gains tax liability when much or all of that gain is purely from inflation. For example, a stock purchased in 1990 for $1000 and sold today for $1676 would face a capital gains tax liability on the $676 “profit.” But in reality, 100% of that “gain” is attributable to inflation.

If the Treasury Department were to re-define “basis” to discount the effects of inflation, it would have a timely and pertinent effect on the current financial challenges. Households and businesses would be able to sell assets, unlock liquidity, and pay a much lower level of taxes. This liquidity is badly needed by capital markets. Best of all, this can be done by you unilaterally, substituting Congressional permission in favor of mere consultation.

Sincerely,
Grover Norquist

– E!! says:  This is better than nothing, but I’d like it much more if we eliminated the capital gains tax altogether.  (Yes, I realize that is probably a pipe dream.  That being the case, Grover’s suggestion is excellent.)

I had the honor of meeting and assisting Pat Toomey last week at the Conservative Leadership Conference here in Las Vegas.  This morning, Club for Growth says/releases the following (excerpted):

Eighteen months into the credit crunch, many largely capitalized financial services firms are experiencing serious difficulties but the overall economy continues to grow.  GDP growth over the past 12 months was 2.25 percent and 3.5 percent when excluding the drag imposed by the housing sector.  Even within the financial sector, many banks are doing well.  Regional bank indices had risen significantly since the lows of last July—prior to the bailout announcement—and thousands of community banks are thriving.  It is extraordinary that a massive government intervention in the economy is considered inevitable when the economy is not even in a recession.

Indeed it is.  On what is the panic of Wall Street types based?  Could it be fear that lack of liquidity and credit in the market will affect their own bank accounts?

At the same time, socializing economic risks come at a great cost to the American economy by misallocating capital, inviting political manipulation, and putting taxpayers on the hook for possibly a trillion dollars.  Such a large takeover by the government will surely be accompanied by adverse, unintended consequences.  Already, other companies and industries are lining up at government’s door asking for their own bailout.  And if the government incurs $700 billion in debt to finance the purchase of bad bank assets, the danger that it will eventually monetize that debt and trigger dramatic inflation is very worrisome.

“Unintended consequences.”  This concept is one of the great underlying tenets of conservative thought.  The idea is that when one makes broad, sweeping changes there are always unplanned effects, and they are often worse than the problem with which you began.

Our Do Nothing Congress should, in this case, do nothing (other than what Newt said yesterday).  We ought to free things up where we can, allow the market to self-correct, and let those who must (and should) take their proverbial Lumps. 

Access to unlimited cash and credit is not a “human right,” and we should stop behaving as if it is.