Open Letter To President Bush Regarding Tax Policy For Black Americans

Mr. President we were delighted to read in USA Today (January 12, 2001) that you think that good tax policy is a key administration priority to assist Black Americans with economic advancement. The lopsided vote of Blacks in favor of Democratic Party presidential nominee Al Gore, in many respects, is the result of two obvious problems: first, the Republican Party's lack of a substantive connection with the Black electorate and Black opinion leaders; and, second, your lack of commitment to an unequivocal program to promote economic development in the Black community. Your failure to win a significant percentage of the Black vote was not simply the result of dissatisfaction with you personally or with your stated policy positions.

Over the next four years, your success in improving relations with the Black electorate, to the surprise of many, may in large part depend upon your management of US fiscal policy and your ability to help the Black community move away from its current relationship with government that places a higher premium on anti-poverty measures than it does on economic growth polices.

To this end we suggest that you aggressively use the lever of fiscal policy to advance the process of wealth creation in the Black community in a manner that allows Americans to retain more of their pre and after tax earnings and to transfer those earnings into financial instruments and equity investments that make capital more plentiful and available to entrepreneurs, small business owners and publicly-traded firms.

Amend the Community Renewal Act. This act that received bi-partisan support has a flawed provision that eliminates all capital gains taxes for businesses operating in distressed urban and rural areas only after an investment is made and held for five years. This provision implicitly endorses a fundamentally erroneous proposition promulgated by Treasury Secretaries Rubin and Summers, that patient capital is required to bring meaningful investment into the inner city. On the contrary, this provision raises the cost of risk capital by reducing liquidity and will necessarily reduce the amount of investment available for the most risky ventures. What cities need is risk capital, like that which Goldman, Sachs and Citicorp invest everyday in currency and equity markets. For years the Black community has struggled from its excessive reliance upon debt rather than equity to finance its business enterprises. The provision mandating that an investor wait five years before receiving 100% capital gains tax elimination actually causes the investment to look more like a bond than an equity instrument because the investor is required to wait a certain amount of time before profiting from the use of their capital. We are convinced that if this provision were eliminated from the Community Renewal Act, in favor of a provision which shortens the required holding period to one year, it would result in not just more capital being poured into Black-owned enterprises but also would result in several of these same enterprises attracting investment through initial public offerings (IPOs).

Increase the personal exemption. In 1952, the Congress allowed each and every family to deduct $500 per person from earned income to reduce the level subjected to taxation. This provision remains in the tax code, but significantly lags the purchasing power of the $500 to the 1950's. Specifically, the code now allows a $2,750 exemption. However, an adjustment to counteract the severe inflation of the 'seventies and 'eighties would boost the amount of the personal exemption to almost $5,000. Unlike adjustments to the marriage penalty tax, the increased exemption would immediately benefit the vast majority of middle income Blacks, who more than any other group, have suffered from monetary inflation of the last 30 years. If the exemption were increased it would mean that a typical black family of four would pay no federal income taxes on their first $35,000 in earnings!

Eliminate the death tax. This policy effort has also received widespread bi-partisan support in Congress and from some important members of the Congressional Black Caucus, including Rep. William Jefferson of Louisiana. The Black Community is accumulating wealth more rapidly than at any previous period in history and will benefit in short order by passing this wealth onto succeeding generations. The current policy retards the development of capital for those who have the least and actually may force the sale of several family-owned businesses in the Black community that would be forced to pay more in taxes than they do in expenses to maintain the yearly operation of their businesses.

Reduce the capital gains tax. Your economic advisers curiously avoided the one policy initiative that would surely improve the economic condition of Black Americans. They properly want to reduce marginal tax rates, albeit slowly, but failed to convince you that the prosperity witnessed since 1995 was anticipated and occurred when the capital gains tax was cut in 1997! The reason is simple: all economic growth comes from risk taking. Only after-tax income is available for savings or investments, and hence called 'capital.' Savings supports debt instruments and loans that will be lent to businesses and people with collateral. Investments are most often made in nascent enterprises and in people that lack collateral from those with money in exchange for equity that make claims on the future profits and increased value of that equity. The number of 'equity chances' in untested enterprises will increase only when the amount of capital increases. The most important beneficiaries, then, are African-Americans, Latinos, and others that lack the collateral of most white Americans or established corporations.

Adopting these policies would help Black Americans by ensuring that the economy of the United States continues to grow at ever accelerating rates; by raising incomes that result from bidding competition by capital providers; and by increasing the amount of income that remains after the payment of taxes. We hope that you will consider all of these policy initiatives during the first 100 days of your Presidency.

We are confident that if you do it will not only go a long way toward repairing the damaged relationship between you and the Black electorate but will also, as a whole, improve the condition of the entire US economy - an issue that you have expressed great concern about.

Sincerely,

Stephen Shipman

Executive Vice-President and Portfolio Manager

George D. Bjurman & Associates, Inc.

Monday, January 22, 2001