A NEW POPULIST CAPITALISM SCRIPPS HOWARD NEWS SERVICE Date: Friday, July 23, 1999 Section: Source: By LINDA SEEBACH Scripps Howard News Service Memo: Embargoed for SUNDAY release (Linda Seebach is an editorial writer for the Denver Rocky Mountain News in Colorado.) Edition: The $792 billion tax-cut bill passed Thursday by the U.S. House of Representatives is a political reaction to a changing economic reality. In steadily increasing numbers, Americans have become investors. They buy stocks and mutual funds directly, often for retirement accounts offering tax benefits. Or they invest through their employers, in employee stock ownership plans or sometimes even stock options, or in the popular retirement plans affectionately nicknamed 401(k)s. Unlike the money they ship off to Social Security, or the contributions made to a company pension plan that the company owns, this is their money. They can take it with them when they change jobs, rely on it for a rainy day and leave it to their children when they die. When demagogues and Democrats start talking about giveaways to the rich, these are the people who say, "Hey, wait a minute. That's me you're talking about, and I'm not rich." At 85 million strong, and growing fast, this army of part-time capitalists already represents more than half of American households. But even that startling fact underestimates how many people, over their lifetimes, have an interest in how capital is treated, or mistreated, by the tax system. Younger workers may not themselves yet be putting money into a retirement account, but most of them expect to, someday soon. In the meantime, they take a keen interest in the financial affairs of their parents. At retirement, some people who have been investors trade in their stock holdings for a guaranteed income, but that doesn't mean they stop paying attention. The tax bill, passed 223-208 with the votes of all but four Republicans plus six Democrats, responds to this new populist capitalism. It does cut income tax rates, by 10 percent over 10 years providing the promised surplus actually appears, but it also increases allowable contributions to retirement plans, reduces and eventually repeals the estate tax and the alternative minimum tax, and reduces the top tax rate on most capital gains to 15 percent from 20 percent. Unfortunately, it's not going to become law in anything like the current form. President Clinton has said he will veto any bill of this size; he has grudgingly agreed to a $300 billion cut, but he is holding out for spending the remaining half-trillion dollars, apparently not satisfied with the fact that federal revenue has grown from $1.15 trillion to $1.82 trillion during his administration, up nearly 60 percent. And the bill working its way through the Senate, though about the same size as the House bill, is less favorable to investors. It would be simplistic to assume that as soon as people put a little money into the stock market, they start voting Republican. The investor class is too broadly spread through the population. But it's equally difficult to believe that all these millions of shareholders entirely disregard their own financial interests when they vote. "The Rise of Worker Capitalism," a forthcoming report by Richard Nadler for the Cato Institute, examines who owns shares, the value of their assets and whether it affects their opinion on policy issues such as the capital gains tax. Asset value naturally varies with age and income. Nadler cites a 1996 study from the Investment Company Institute and the Employee Benefit Research Institute of 2.5 million people in 23,000 401(k) plans. Workers in their 20s had an average of $6,000 in their accounts; those in their 60s, $67,000. Those who had been in plans at least 30 years averaged more than $150,000. And those numbers were from 1995; since then, the stock markets have doubled. That twentysomethings are starting to save for retirement is a relatively recent, and welcome, development. When I started teaching in the 1960s, we weren't even eligible to put money in the college's retirement plan until age 35. Now close to a quarter of householders younger than 25 own mutual funds. In fact, the number of investors is up in virtually every demographic category. And polls are beginning to track whether it matters. A 1999 survey by Rasmussen Research found that 66 percent of those who owned more than $5,000 worth of stocks, bonds or mutual funds supported a capital gains tax cut, compared with 46 percent of those who didn't. It isn't surprising that there is a difference; I would have guessed it would be bigger. But neither would it be surprising, as more and more Americans join this not-very-exclusive ownership club, if they began to vote accordingly. Republicans have noticed. Democrats haven't.