A ‘war against winners’

The precipitous stock market plunge of June 22, with the Dow Jones dropping 185 points, is all about Washington’s continued war on prosperity.

The latest assault comes courtesy of Rep. Sander Levin, Michigan Democrat. Late last week, he introduced a bill that essentially would abolish the 15 percent capital-gains tax preference for risk investing, and raise it by 20 percentage points to the 35 percent corporate and personal rate. This goes beyond an earlier tax attack on a public offering by the Blackstone Group, and would slam into all private partnerships, including buyout funds, hedge funds, venture-capital firms, real estate partnerships, and oil-and-gas deals.

Incidentally, while attacking capital gains, congressional Democrats are killing initiatives for across-the-board cuts on wasteful appropriation bills. According to the Club for Growth, House Democrats defeated separate measures that would cut spending by 4 percent, 1 percent, and 0.5 percent.

Does this mean the Democrats favor tax increases over real spending control? It appears so.

Washington economist Kevin Hassett says this is part of the Democrats’ “war against winners,” and he’s right on the money. In particular, these willy-nilly changes of the tax rules would chill capital formation, and could constitute the biggest attack on capital since the 1930s.

As mentioned, the lightning rod in this tax-increase endeavor was the Blackstone Group, the private-equity giant that went public several weeks ago. Blackstone’s investment-fund profits are taxed at the 15 percent cap-gains rate, and since these profits come from high-risk investments, that’s how it should be. But Democrats in Congress view these profits as plain income, and greedily want a higher take.

But plain ol’ income this is not. The recent crack up of two Bear Stearns sub-prime-mortgage hedge funds shows just how risky these ventures can be.

Yes, there’s big money to be made when these private partnerships click. But the economy at large also is a beneficiary. Private buyout funds often save highly troubled companies from bankruptcy. They insert skilled managers who streamline operations and make businesses more efficient, a process that can ultimately lead to greater profits and business expansion. You know a lot of these companies: Chrysler, Staples, Sears, Domino’s, Dunkin’ Donuts, Toys ’R’ Us, Clear Channel Communications, Hospital Corporation of America. All these firms were brought back from the dead thanks to private partnerships.

Nobody knows for sure if Congress will green-light the Democrats’ anti-growth agenda. It is hoped that President Bush will veto any tax increase that lands on his desk. But the mere threat that Congress would embark on such a program of wealth destruction and economic impoverishment — all in the name of taxing “rich people” — has investors reeling.

Ironically, a lot of today’s anti-cap-gains momentum is the handiwork of former Clinton Treasury Secretary Robert Rubin. He actually believes a low cap-gains tax has no economic growth effect at all. However, back when President Bill Clinton and Mr. Rubin were running things, the personal income-tax rate was lifted from 31 percent to 40 percent, while the cap-gains tax was reduced from 28 percent to 20 percent, making for a 20 percentage point tax advantage for cap-gains over regular income. Flashing forward, the current Bush administration lowered the income-tax rate to 35 percent and the cap-gains rate to 15 percent, preserving that 20 percent differential.

Hmm… . Is Mr. Rubin saying the cap-gains tax advantage was good for the Clinton boom, but not the Bush boom?

Truth is, that differential provides a strong incentive for entrepreneurial risk taking and higher-risk, cutting-edge investment — both of which lend real torque to the economy.

Another unfortunate irony is that while Democrats think they’re striking out at the rich, they’re actually jeopardizing the retirement portfolios of millions of middle-income Americans. Firemen, police officers and teachers, to name a few, are all represented by the big state and city pension funds. And these funds are heavily invested in the hedge and private-equity funds that the Democratic tax machine is targeting. Is this fact lost on the Democrats? And don’t they realize that 2 in every 3 voters in recent elections owned stocks — either directly or indirectly? Are they attempting to commit political suicide?

If the Democrats get their way, job creation will be adversely affected, too. Clearly, you can’t create new jobs in the private sector unless there’s a new or expanding business to create those jobs. And since new and expanding businesses require capital for investment funding, if you tax that capital more, you get less investment and fewer jobs.

In short, you can’t have capitalism without capital. The process works for “rich people” and the middle class.

Whenever Democrats wage war against the rich, the middle class becomes the collateral damage. This may be the law of unintended consequences, but it is something this Congress fails to understand.

Lawrence Kudlow is host of CNBC’s “Kudlow & Company” and is a nationally syndicated columnist.