Republicans and Democrats Just Don't Get It When It Comes To Blacks And The Capital Gains Tax

As the stock market continues to fall or struggle you can expect to hear a lot of talk about the need for a cut in the capital gain tax. Already a bipartisan effort in support of a capital gains tax cut has begun to emerge and we think that it is a safe bet that eventually, a cut in the rate from 20% to 15% will occur. But the Democrats and Republicans, in support of the action, make their arguments without the community in mind that stands to benefit the most from a cut or elimination of the capital gains tax cut - Black America.

When you listen to both sides argue on behalf of a capgains cut they do so purely from the perspective and in the interest of those who have already accumulated capital and not in the interests of those on the margin with little or no capital but who are entrepreneurs who are taking risks through the commercialization of their talents and skills and their trading of such in the marketplace.

Generally speaking, Republicans think they can save the US economy by helping those who have already accumulated capital to attract more of it. But the way to save the US economy is by first pulling up those on the bottom - getting them out of poverty and into production at the highest possible level - according to their talents, skills and interests. One of the ways to do this is by making capital more plentiful among the poor.

Democrats have traditionally thought this can be done with anti-poverty statist programs that put spending money into the hands of the poor or which provide them directly with food, clothing and shelter. But this approach is akin to charity, which is wonderful and necessary, but which does not promote economic development or growth.

The Democrats look to promote anti-poverty measures while Republicans aim at maintaining an economic status quo.The former seeks to alleviate the pressures and suffering of poverty while the latter aims at preserving the capital of those who already have it. Putting the rhetoric of the two parties aside, neither approach produces wealth-creation among the poor.

This is one of the major reasons why Black America has not overcome the material poverty that slavery created. This country has never removed the barriers to capital accumulation that exist among Blacks, while it has continued to confiscate the earnings of Blacks through taxation and inflation and more recently through deflation as it is Blacks who have suffered the most in the last 4 years of monetary deflation having to pay back loans with more valuable dollars, in terms of gold, than the ones they borrowed; with exorbitant interest rates tacked on to the principal because Blacks are said to be "credit risks".

Of course, the largest hindrance to capital accumulation has been racism.

It is in America's inner cities, where Blacks are concentrated, where the obstacles to capital formation need to be removed the most - even more than on Wall St. It is in the inner-cities where predatory lending practices occur that wickedly take advantage of the barriers to obtaining capital that exist for Blacks. Predatory lending only occurs because bank institutions are not willing to extend capital to Blacks either because of racism or their unwillingness to make loans to credit risks.

Because Blacks, during slavery, were denied the opportunity to receive earnings, turn those earnings into financial assets or new businesses enterprises, and then denied the ability to pass on those aasets and businesses to their heirs, Blacks have suffered a unique deficit in capital formation.

And even after Blacks were allowed to engage in economic activity they did so via debt and not equity. To this day, Blacks disproportionately depend upon debt to finance the vast bulk of their entrepreneurial activities. This dependence on debt relegates the Black community to a perpetual cycle of poverty.

That is why we have argued that the capital gains tax be eliminated in America's inner cities and wrote such in January, in our "Open Letter To President Bush Regarding Tax Policy For Black Americans". We wrote:

"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."

In our letter to President Bush we also recognized the value of the Community Renewal Act, which does eliminate the capital gains tax in inner cities but mandates a 5-year holding period before one can qualify for the 0 % capgains tax. This 5-year holding period was primarily the work of Democrats who don't have a clue as to how wealth is created and who fear speculative investments. But that is exactly what Blacks need more of in their economy- investment speculation on the prospects of the risk-taking of Black entrepreneurs. We asked President Bush to lead an effort to amend the 5-year holding year provision:

"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)."

Waiting for both political parties, on their own, to eliminate the capital gains tax with Blacks in mind, is worse than watching molasses roll. In fact, in 135 years, America's two-party system has been totally missing in action when it comes to promoting wealth-creation in Black America.

Evidently, the case will have to be taken to them by the Black electorate.

Cedric Muhammad

Tuesday, March 13, 2001