As the only explicit tax on successful risk-taking, any capital gains tax is counter-productive. When the market mechanism sees a capital gains tax of 100%, it stops cold. The market will continue to accept capital from individuals who face a lower rate, either on the scale of progressive rates or through loopholes. If the capital gains rate is 100% for everyone in the system, though, all legal enterprise will eventually stop in its tracks. One way or another, all paper assets -- promises and claims -- are underpinned by human toil and initiative. When there is no possibility of gain through risk-taking, there might still be people willing to convert surplus time, energy or talent into paper promises that might at least hold their own -- debt over equity. But over time, economic implosion is as inevitable as it was in the USSR, when elitist plans were overwhelmed by error. Telescoped down to the family unit, a 100% tax on capital gains is the equivalent of parents being prevented from educating their children. (Education is a critical form of capital; what an individual or a family or a nation state learns today, it can use tomorrow.)

A 28% tax on capital gains that have not been indexed against inflation can be almost as bad as a 100% rate, depending upon the expected rate of inflation. This is because almost any new enterprise must have sufficient capital to see it through at least five years of market demands and struggle before it can feel a bit secure. The market mechanisms that absorb and dispense capital must cope with the monetary variable in reckoning the true after-tax ROI. Riskier enterprises cannot hope to find capital and credit in an inflationary environment, even without the compounding effect via capital gains taxation, because sources of capital simply disappear. Sources of capital become more plentiful in a deflationary environment, but those who might otherwise employ that capital are discouraged by its high real interest costs in a world of falling nominal prices. As a matter of simple arithmetic, the risks to capital in a combination of inflation and unindexed capital gains are at a maximum. It makes little difference that most market allocation of capital does not directly consider the capital gains tax, only risk-taking that cannot be insured. But as Chicago economist Frank Knight postulated almost 80 years ago, uninsurable risk-taking is the ultimate source of all economic growth.

In a U.S. economy that would suddenly shift to a gold-standard with no tax on capital gains, untapped capital would rapidly flow into the marketplace and be dispensed according to a steepening schedule of risks. We could not predict how the market’s "invisible hand" would allocate the capital. It may even be that fewer enterprises would be initiated, while those already in existence would take on added capital and grow faster. It follows from this hypothesis that any marginal increase in the volatility of the dollar price of gold will cause less capital to flow into the market, with less available for deployment on any schedule of risks.

A mature enterprise that has all or most of its capital gains behind it does not need a gold standard or zero capital gains taxation in order to coax working capital out of those who have it, promising to repay it with interest or dividends. Big Business is generally risk averse, which puts it at the lower end of the schedule of risks when capital is available. There actually are complications which arise for Corporate America out of a surplus of capital. This tends to restrain the capitalist class’s support for genuine capital formation -- an observation of Ludwig von Mises on the right as well as Marx on the left. The most worrisome complication for Big Business is that policy changes that enhance the flow of capital to the market put upward pressure on the price of labor. The American Council for Capital Formation, for example, is a Big Business Washington lobby, which technically supports a lower tax on capital gains, but which spends little of its time or resources toward that end. Instead it pushes and shoves on Capitol Hill for tax breaks that fall into the category of corporate socialism, which do nothing to draw capital to fledgling enterprise. Given the choice of ending the capital gains tax or ending the double taxation of dividends, it would of course choose the latter. Oddly, the Council in 1977-78 was the driving force behind the capital gains tax cut that passed at the time, but that was when its members were still the fledgling enterprises of Silicon Valley. It has since matured along with its members.

A dramatic increase in the flow of capital to the market would have the unusual effect of eliminating jobs over time. Where it now takes two breadwinners to earn what one did formerly, an infusion of capital would enable one to do the work of two. The composition of the work force would also change, of course, as there would be a dramatic decline in the number of Americans needed to tend to social pathologies and economic volatility. In many cases, employes would not have to leave their desks to switch jobs, however. Lawyers and accountants, bankers and bond salesmen would shift mental gears to serve an economy in expansion instead of retreat. The global demand for U.S. white-collar expertise in a Pax Americana would swell college ranks again. Corporate America would be forced to automate faster, as blue-collar workers would be bid up in wages or move back to their higher-paid one-breadwinner families.

It is, after all, not enough to focus only on capital formation from the investment side, merely because that happens to be the current crisis of capitalism. Recall that England got the "British disease" of stagflation in the years following World War II. Yet at the time it was part of the Bretton Woods gold standard and there was no tax on capital gains. The problem then was that labor was still being taxed at the very high rates that remained in place from World War I, and interest and dividend income was being taxed at confiscatory rates; "unearned income," as it was called by British socialists, faced surtaxes that brought the top marginal rate to 96%. Socialized heavy industry and transportation drew upon the government for working capital, but for the most part Brits with surplus time, energy or talent found negative ROI in the private marketplace and chose government employ instead. Until Maggie Thatcher arrived, "going for growth" in England meant running up government spending in Keynesian fashion and occasionally devaluing the pound, which of course produced the phenomenon of stagflation.

Even when tax and monetary policy are at an absolute ideal, other political monkey wrenches always can throw the economy into a tailspin. Domestic tax and monetary policies could hardly have improved in 1929, when Corporate America decided to get greedy on the protective tariff. Governments can prevent upstart, entrepreneurial growth through regulations that appear to be fair because they face all business equally. But regulations that bear equally on the old and the new, the big and the small, the rich and the poor, always favor the old, the big and the rich -- like a poll tax. There is still enough entrepreneurial spirit and political clout in the United States to fend off business mandates on health care and wages, of the kind favored by the Fortune 500, because they already meet them. Throughout Europe, established corporations support strict bankruptcy laws for newcomers, while the United States still has room for repeated business failures. In much of Asia, small businesses encounter crushing tax and regulatory mandates once they manage to cross a relatively low income threshold, which keeps entrepreneurial Asia at the mom and pop level.

The United States still is the last, best hope of mankind, if there ever is going to be an example set here on the best path to economic growth through democratic, entrepreneurial capitalism. The answer is not technological advance and never has been. All the new toys and technologies of the Roaring Twenties did not prevent the Great Depression and World War II. We are well into the Computer Age and the Information Age, yet four-fifths of the population of the world still has not reached the modest living standards Americans and Europeans enjoyed at a comparable stage of the Industrial Revolution. The argument that the rising tide of technological innovation will lift all boats is self-serving elitist dogma. It is a useless in solving the capitalist crisis in the world today as its counter-argument, the modern Luddite assertion that the capitalist crisis has been caused by too much technology.

Both sides of this technology debate avoid the central problem that the country has an enormous amount of work to do that does not require either new technology or the skills required to deal with advanced technology. We are talking here of the need to rebuild or repair the nation’s housing stock and its infrastructure of roads, bridges, sewer systems, water works, public buildings, and transportation systems. The skills required for this kind of work for the most part do not require much more than a good grade school education and an apprentice program in which old carpenters train young carpenters. Most of the basic skills that go into flipping hamburgers in a fast-food restaurant can, with a little training, produce high paid chefs in upscale restaurants. Underground entrepreneurs in the inner cities who peddle drugs and sex can, with a little capital and training, come above ground and peddle widgets. Most of the unutilized capital in the United States today is in the minds and hands of the 127 million ordinary Americans who comprise the work force. If only the market could finance their exchange of that surplus time, energy and capital, the added capital would quickly enable the same number of people to produce twice the goods and services they are producing now. The added capacity to produce wealth would enable many to quit and tend to the home economy. Instead, we now have senior citizens who thought they had retired driven back into the work force as the purchasing power of their pensions disintegrates. The country is functioning at not more than half of its capacity -- not at its limits, as the experts are now telling us. If there is a technology problem, it is as James Burnham wrote 55 years ago, "Capitalism is no longer able to use its own technological possibilities."

Yes, there are high-paid mid-management workers being displaced by computers, even 40,000 at a whack at AT&T. If capitalism were dealing with this technological advance, the 40,000 surplus workers would be seen as a national dividend, to be redeployed at higher levels of utility, not a drag on the system. They would be grabbed up by new enterprise as fast as they were cut loose by AT&T, at higher paying jobs. When capitalism was working well, the 40,000 blacksmiths or buggy whip workers were being snapped up by Henry Ford at wages they had not even dreamed about. The crux of the problem is not a surplus or dearth of technology. It is a breakdown in financial intermediation -- the ability of the market to finance the exchange of relatively simple tasks, because of the risks attached to a floating currency and almost confiscatory taxation of capital. (Even putting aside the tax on capital gains, Gary and Aldona Robbins of Fiscal Associates in Arlington, Va., reckon the marginal tax on business capital at 66.3%, an all-time peacetime high.)

If the United States were to adopt optimum monetary, tax, and regulatory policies, it would certainly have to encourage the rest of the world to follow its example. If we are now among the most efficient of capitalist economies in the world, and are struggling at half our capacity, think of how far behind we would leave the rest of the world if we were operating at optimum speed. Our growth would be a great problem for the Establishment, which now encourages open immigration in order to attract more cheap labor. Our capitalist Ruling Class normally does not encourage other countries to grow rapidly, instead dispatching the International Monetary Fund to discourage emerging markets from emerging. Explosive growth in the United States would pull the work force out of Mexico even faster than the present rates. As we did observe in the Reagan years, though, our supply-side successes were quickly copied by much of the developed world.

At the moment, prospects for this kind of fundamental change seem remote. Not only are the two major political parties moving away from plans for basic reform, they are also persuading themselves that the nation is in an economic equilibrium that is about as good as we can expect. Ross Perot and Pat Buchanan and Steve Forbes and Ralph Nader -- the four political populists who have identified the anxieties at the bottom of the socio-economic pyramid in different ways -- are each moving in different directions. The know that the folks at the bottom sense they are at a knife edge of desperation. They don’t seem to agree upon any formula that could force change at the top -- and thus appear to be dissipating as a political force that could threaten those at the top. The only possible solution may be a third party that unites the populists around central views upon which they could agree, which would force the two major parties controlled at the top to compete for their votes. Without this kind of dynamic, the status quo of continued contraction could tip anxieties over the knife edge, and political change could result from social strife. The last Million Man March may have been the last peaceful one. Then again, perhaps we can avoid such unhappy options through incremental change. We would then simply have to wait another four years for the kind of economic growth we have described here.