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Think tanks wrap-up II

WASHINGTON, Sept. 9 (UPI) -- The UPI think tank wrap-up is a daily digest covering brief opinion pieces, reactions to recent news events and position statements released by various think tanks. This is the second of two wrap-ups for Sept. 9, 2002.


The National Center for Policy Analysis

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(The NCPA is a nonprofit, nonpartisan public policy research institute that seeks innovative private sector solutions to public policy problems.)

DALLAS, Tex. -- How to Save Social Security

By John C. Goodman and Matt Moore

President Bush's bipartisan Social Security reform commission delivered its final recommendations for repairing Social Security in December 2001. The commission asked for a yearlong dialog on reform to help the American people better understand the difficult choices ahead and to build public and congressional consensus around a particular solution.

Unfortunately, politics has pushed reform to the back burner. And while Congress dawdles, the problem grows.

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Social Security is currently running a surplus. However, these days of plenty are in short supply. In just 15 years, Social Security will pay out more than it collects in taxes. In each following year, the deficit will grow larger. Over the next 75 years, Social Security faces a total debt of $25 trillion (measured in current dollars).

If taxes stay the same, benefits must be cut by up to a third for future retirees. If benefits stay the same, taxes must rise by half to cover the gap.

Opponents of reform say we should not tinker with Social Security. But in saying that they implicitly are endorsing a cut in Social Security benefits for baby boomer retirees and all subsequent generations. The reason? Current law requires that Social Security benefits be limited to the program's income. That means in 2041 -- when all the Treasury IOUs in the trust fund have been reclaimed -- and in each year thereafter, benefits will have to be cut to match payroll tax revenues.

A plan developed by the National Center for Policy Analysis combines the most attractive features of major proposals by both Republicans and Democrats over the past several years. It allows younger workers to deposit two percentage points of their current 10.7 percent Social Security tax in a personal retirement account, or PRA, that they would own and control. Workers would choose from a select number of portfolios that reflect the market as a whole -- 70 percent stocks/30 percent bonds -- sponsored by government-approved fund managers.

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Upon retirement, individuals could purchase a variable annuity, holding the same diversified portfolio as in pre-retirement. Participating retirees would receive two monthly benefit checks: one from a PRA and another from the government to bring benefits up to currently scheduled benefit levels.

The NCPA proposal assumes a dollar-for-dollar offset. Each dollar in an individual's account reduces the government's obligation by a dollar. For the first several decades under the new plan, annuities would not play a significant role. But in the future, account balances will be large enough to annuitize the scheduled benefit.

Without reform, Social Security promises will exceed Social Security income beginning in 2017. The gap between the two will grow indefinitely into the future. Many reform plans also call for explicit or implicit benefit cuts. These include raising the retirement age and changing the cost of living adjustment. Under the NCPA's suggested reform, Social Security would be able to pay promised benefits with the current tax rate by the time today's teenagers retire.

Without reform, taxes will have to increase by up to 50 percent if Social Security is to continue paying full promised benefits. With reform, taxes will equal benefit payments by 2058, and Social Security will run annual surpluses in each year thereafter. Some additional funds will be needed to pay full benefits between 2008 and 2058. Our simulation assumes the government makes up the difference by borrowing.

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Some reform plans would give individuals a great deal of discretion in selecting their retirement account portfolios. This grants participants a high degree of individual choice, but also exposes inexperienced or aggressive investors to added risk. The NCPA approach would reduce individual discretion, but eliminate downside risk through a government guarantee that retirees would receive scheduled benefits by forfeiting upside gains.

Workers would choose from a list of government-approved-and-supervised fund managers, each of which would offer a balanced, diversified portfolio that tracks the market as a whole. From day-to-day and even year-to-year the market fluctuates widely, but over the long term, the market always makes positive gains:

-- For example, in all of the 35-year periods over the last 128 years, the market has yielded an average annual 6.4 percent real rate of return.

-- Even the lowest-earning 35-year period, which ended in 1921, yielded an average real rate of return of 2.7 percent, which is higher than Social Security's meager 2 percent rate of return on payroll taxes.

While some borrowing in the short term will be necessary to bridge the transition, our analysis shows that Social Security would be able to pay its own way by 2058 and thereafter. Opponents of reform -- including Rep. Richard Gephardt, D-Mo., and others -- propose to use the Social Security surplus to pay down the publicly held debt during the surplus years and borrow the money back once deficits appear again.

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-- By 2031 the debt under the Gephardt approach would be back at the same level it is today.

-- By 2058, when the NCPA reform plan begins running surpluses, the Gephardt approach would be mired in increasing annual deficits. [See Figure II.]

-- By 2075, the national debt would be vastly greater under the Gephardt approach than under the NCPA reform plan.

Participation in the new system would be voluntary. Workers who choose to remain with the current system may do so, but they must accept lower monthly benefits as a result as the old system's finances deteriorate through time.

There are additional reasons to adopt this reform. First, participants could leave the balance of their personal account to their heirs. Second, because the NCPA approach requires dual earner couples to share family earnings between their accounts equally, working women and divorcees would not be penalized. Third, workers would be able to choose their own retirement age, accepting lower monthly benefits for early retirement and higher benefits for delayed retirement

(John C. Goodman is president of, and Matt Moore is a policy analyst with, the National Center for Policy Analysis.)


Why Tax Capital Gains?

By Bruce Bartlett

Following his Waco economic conference, President Bush told reporters about several tax initiatives that he may soon propose to aid beleaguered investors. Although he did not specifically mention cutting the capital gains tax rate, it is almost certain that some action in this area will be included. Final decisions have not been made, but a final proposal is expected soon after Sept. 11.

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I hope that the administration will avoid making purely pragmatic arguments for cutting the capital gains tax, which should be cut. While such arguments worked in 1978, they have been much less successful since. What is desperately needed is a principled case for why capital gains should not be taxed at all.

While it may seem commonsensical that capital gains are a form of income just like any other, in fact this is not the case. As the great economist Irving Fisher once explained, it confuses the fruit and the tree. Trees grow and they also produce fruit. The fruit is income and is justly taxed. But growth of the tree is an increase in capital. More capital will produce more income in the future, which will be taxed, but taxing the capital itself is counterproductive.

We already tax income very heavily. This includes taxes on wages, rent, dividends and interest. Alternatively, we could say that we are taxing the returns to human capital, real estate, corporate stock and saving. Since we do not tax increases in the stock of human capital, such as when someone acquires new skills or education, taxing wages is a single tax. But if we tax increases in the value of real estate, stock or bonds, while also taxing rent, dividends and interest, then it is a double tax.

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As Prof. Fisher would say, we are taxing the tree and the fruit, when we should only be taxing one or the other. Taxing capital gains is like chopping limbs off of trees. We only end up with less fruit in the future. Not taxing capital gains -- not chopping limbs --would allow the tree to grow, which will produce more fruit in the future and increase government's take of it.

Therefore, in principle, capital gains should not be taxed at all. Capital gains are not income, except in the minds of those incapable of complex thought. The present 20 percent maximum tax rate on capital gains, while the top rate on wages is more than twice that, is not a preference or giveaway, but the mitigation of something that is wrong in the first place.

Viewed in this light -- a position once held by the U.S. Supreme Court in the case of Gray v. Darlington (1872) -- cutting the capital gains tax is simply the redress of an illegitimate form of taxation.

This is not to say that cutting the capital gains tax will not also have beneficial economic effects. Indeed, the experience of the 1969 and 1986 increases in the capital gains tax, and the 1978, 1981 and 1997 reductions, strongly suggests that capital gains realizations will expand by more than enough to actually raise federal revenue.

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According to the Treasury Department, there is almost an exact inverse relationship between the long-term capital gains tax rate and realizations as a share of the gross domestic product. When the rate goes up, realizations go down. When the rate goes down, realizations go up. Generally speaking, the magnitudes are such that the government makes money when the rate is cut and loses money when it is increased.

Ironically, the principal argument against cutting the capital gains tax is that it will primarily benefit the rich. But if revenues are rising, how can this be the case? The answer is that revenue estimators assume that the same assets would have been sold anyway at the higher tax rate. No matter how much evidence is presented to the contrary, they refuse to acknowledge that higher taxes on the rich are in fact higher taxes on the rich. Somehow, they always make it look like a tax cut.

Among those most consistent in their belief that capital gains taxes are wrong in principle is Federal Reserve Board Chairman Alan Greenspan, who has said so on many occasions: "I've always been supportive of either lowering the capital gains tax or preferably eliminating it completely," Mr. Greenspan told the Senate Banking Committee a few years ago. "There's no question in my mind that a capital gains tax cut would be helpful with respect to the issue of property values and economic growth," he added.

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Given current economic and financial conditions, the latter point undoubtedly means more to most people than the theoretically correct approach to capital gains taxation. President Bush should not be shy about making BOTH arguments.

(Bruce Bartlett is a senior fellow at the National Center for Policy Analysis.)


The Cato Institute

WASHGINTON -- America helps China crack down on domestic 'enemies'

By Ted Galen Carpenter

Deputy Secretary of State Richard Armitage arrived in Beijing with a highly desirable present for China's communist government. He announced that the State Department was putting the East Turkestan Islamic Movement, known as the ETIM, the principal separatist organization in China's restless Xinjiang province, on its list of terrorist organizations.

Washington has thus embraced Beijing's dubious, self-serving view that the secessionist campaign in Xinjiang is nothing more than a manifestation of international terrorism.

It is likely that Armitage's gesture is part of a move based on realpolitik calculations to repair U.S.-China relations that have been under some strain ever since the Bush administration took office. The tensions over the April 2001 collision between a Chinese fighter plane and a United States spy plane, and Beijing's adverse reaction to President Bush's firm pledge to defend Taiwan, are only the most prominent examples.

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The one area in which there has been close cooperation between the two countries is on the issue of terrorism since Sept. 11. It would, therefore, hardly be surprising that Washington would seek ways to consolidate that cooperation.

Nevertheless, backing Beijing's position regarding Xinjiang reflects neither moral courage nor intelligent policy on the part of the administration. Even worse, this is not the first time that Washington has uncritically accepted the position of another government that its political adversaries are nothing more than odious terrorists.

Since Sept. 11, regimes around the world have tried to secure U.S. backing by packaging their problems with insurgents as part of the global terrorist menace. Russia portrays the conflict in Chechnya in that light.

The Philippines contends that not only is the motley gang of kidnappers, Abu-Sayef, an al-Qaeda clone but that a long-standing Islamic secessionist movement, the Moro National Liberation Front, is linked to al-Qaeda.

India insists the insurgents in Kashmir are part of a terrorist international, and New Delhi argues that its suppression of Kashmiri separatism is the moral equivalent of America's actions taken since Sept. 11. The government of Colombia contends that left-wing rebels in that country are "narco-terrorists," and is lobbying hard for more U.S. military aid.

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U.S. policymakers ought to be wary of such efforts to entangle the United States in parochial quarrels. It is difficult to determine which allegations have merit, which are exaggerations of the truth, and which are simply convenient fictions propagated by regimes facing intense political pressure. America has enough real enemies without blindly lining up against the adversaries of other governments.

Moreover, it is a worrisome sign that Washington is forging cozy relationships with a variety of repressive regimes, such as those in Uzbekistan, Kazakhstan, and Georgia, which routinely suppress political opposition. During the Cold War, the United States all too often accepted the self-serving rationales of repressive allies that their opponents were merely stooges of Moscow.

America's gullibility on that score led to entanglement in murky civil wars throughout the Third World -- from Vietnam to Nicaragua to Angola. Washington must take care not to make the same blunder in the name of the war against terrorism.

In particular, the United States should be cautious about backing Beijing with regard to the simmering secessionist campaign in Xinjiang. Although the ETIM appears to have had some contact with al-Qaeda and has used terrorist tactics on occasion, the underlying issues in Xinjiang are complex.

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It is a grotesque oversimplification to portray that struggle as an effort by the Beijing regime to suppress terrorism. The Uighur population in Xinjiang has legitimate grievances against China's communist rulers.

The Bush administration would be wise to stay out of that quarrel. If Washington is not careful, it will be seen throughout the Islamic world as having given a moral blessing to Beijing's harsh crackdown on Uighur separatists. It is not in America's best interest to have that reputation.

(Ted Galen Carpenter is vice president for defense and foreign policy studies at the Cato Institute and is the author or editor of 14 books on international affairs including "Peace & Freedom: Foreign Policy for a Constitutional Republic.")

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