Tax Plan Floated as Bailout Alternative

September 24, 2008

As Congress increasingly balks at the Bush Administration's $700 billion Wall Street bailout proposal, the Republican Study Committee yesterday released an alternative plan to ease the financial crisis:

Two-Year Suspension of the Capital Gains [Tax]: Immediately suspend the capital gains rate of 15% for individuals and 35% for corporations. By encouraging corporations to sell unwanted assets, this provision would unleash funds and materials with which to create jobs and grow the economy. After the two-year suspension, capital gains rates would return to present levels but assets would be indexed permanently for any inflationary gains.

Schedule the GSEs for Privatization: Transition Fannie and Freddie over a reasonable time period to truly private companies without special government privileges and open them up to real market competition.[…] [The plan would also subject Fannie Mae and Freddie Mac to state and local taxes.]

Stabilize the Dollar: Repeal the Humphrey-Hawkins Full Employment Act which diverts the Federal Reserve's attention from long-term price stability to short-term economic growth. In an effort to fuel the economy, this additional mandate has encouraged the Fed to keep rates artificially low, fueling economic boom and busts, and now a strong up-tick in inflation and the decline of the dollar (as investors free dollars for hard assets). This reform would require the Fed to establish a numerical definition for price stability and maintain a policy that promotes it over the long-term.

Suspend "Mark to Market" Accounting: Suspend the mark-to-market regulatory rules for long-term assets. These rules require financial firms to mark assets at current market levels, even where the no market exists and any immediate transactions would result in fire-sale prices. Instead of allowing firms to mark these assets to their true economic value, these rules contribute to a downward spiral as firms have to evaluate their assets not on the basis of their long-term investment but rather on a short-term mania.

Caucus Chair Rep. Jen Hensarling (R-TX) predicts that the plan would "bring as much as a trillion dollars in capital sitting on the sidelines back into the market."

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