Flake's Banking Crisis Bailout Alternative: Capital-Gains Tax Holiday

     Now that Congress has a proposal before them to bail out beleaguered investment banks in the wake of the subprime mortgage fallout, there is one way to pump liquidity into the markets almost no one is talking about – cutting the financial obligations of these troubled firms by cutting taxes.

     That was one proposition Rep. Jeff Flake, R-Ariz., suggested when he spoke to conservative bloggers at the Heritage Foundation in Washington, D.C. on Sept. 23. He was promoting his new grassroots activism Web site PorkParade.com.

      But even Flake, a staunch earmark reform crusader, admitted that issue is trivial compared to the current debate going in the U.S. Senate about whether or not to give the Treasury Department the authority to bail out the financial industry to the tune of $700 billion.

     “I’m the first to concede it all seems pretty trivial when you’re deal with a $700 billion bailout this week,” Flake said. “My own views on that are, I think, well known. I think we have shielded for far too long people from the effects of market discipline and that’s the real problem. Some people point at deregulation. It’s not deregulation at all. We have for far too long shielded Fannie and Freddie for example, with the implicit and now explicit guarantee.”

     According to the Citizen’s Against Government Waste “2008 Pig Book,” Congress earmarked 11,610 projects worth $17.2 billion into the 12 appropriations bills for fiscal year 2008 – a drop in the bucket compared to the cost of the solution being debated in Congress now. Flake questioned the effectiveness of the Bush administration’s bailout proposal and what the appropriate response should be.

     “Now I’m not trying to deny that we have a huge problem out there,” Flake said. “But I just can’t see how the answer to any problem is to nationalize every mortgage in America. I just, I think that we are likely still putting an artificial bottom to a bottom that will occur at some point. I just don’t see this solving the problem. I’m not denying that we should do something.”

     The solution – cut taxes. According to a Republican Study Committee memo from July 2 the federal government collected $127 billion in 2007 from capital-gains tax revenues.

     “I think we should have a complete – there is some liquidity out there,” Flake added. “There is a lot of money that could be freed up for example, if you said alright no capital-gains tax at all. Have a holiday for a year, two months, three months, whatever. We got the corporate tax. There are things you can do, you know, to add liquidity, but I just don’t think this is the way to go.”

     Flake also pointed out that the same people pushing the bailout, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke haven’t had that great of a track record – having been wrong about the Bear Stearns and Fannie and Freddie bailouts.

     “All we can say is the same people that were telling us that told us no bailouts after Bear Stearns,” Flake said. “If you give us authority on Freddie and Fannie, we won’t even need to use it and then after that, we’re done with bailouts. And now this. So, they haven’t exactly had the crystal ball.”