The prosperity and even the survival of any nation depends upon its ability to produce capital. Our nation, which throughout most of this century was a net exporter of financial capital to the rest of the world, now is importing one half of its net new capital formation each year from abroad. 1 Reliance upon foreign capital may well prove to be an unreliable source of capital formulation, which is the engine of our economy. The federal deficit has diminished and the budget now projects a small cash flow surplus. Under our present circumstances of a huge deficit in capital formation and a pending social security crisis, a surplus of at least the difference between the current inflows and outflows of Social Security and Medicare would be the minimum for responsible fiscal policy.
Federal taxation reduces the corpus of our nation's capital in the following ways.
Personal savings have declined in recent years because of high marginal rates on our most productive citizens who have the highest propensity to save if allowed to retain their incomes. Profits of corporations are taxed at rates comparable to personal rates, then double taxed as dividends and as capital gains. It is proposed that the following changes be made to the Internal Revenue Code in order to remedy the problems that limit capital formation. Allow rollover of capital gains which are reinvested in any capital assets or accounts without taxation. Tax any capital gains not reinvested at ordinary rates after indexing for inflation.