Opinion Editorial | |
| Monday, August 24, 1998 | |
A Capital Gains Tax Cut Pays for Itself 
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On June 24, House Speaker Newt Gingrich, Georgia Republican, introduced
H.R. 4125, a bill to reduce the maximum capital gains tax rate from 20 percent
to 15 percent. Shortly thereafter, House Ways and Means Committee Chairman
Bill Archer, Republican of Texas, asked the Congressional Budget Office
(CBO) to analyze the potential impact of such legislation on the economy.
On August 4, the CBO sent its report to Chairman Archer, concluding that
a cut in the capital gains tax would have little, if any, impact on economic
growth. The CBO based its judgment primarily on the results of several econometric
models. These are complex computer programs designed to simulate economic
conditions. According to CBO's analysis of the results, the best of them
indicated that the total size of the gross domestic product (GDP) might
be larger by 0.2 percent at the end of 10 years. Other programs showed
an even smaller impact or even a negative one. A number of prominent economists, such as Michael Boskin of Stanford
University, have questioned this conclusion. They point out that the most
important effect of cutting the capital gains tax is on economic variables
that are difficult or impossible to quantify. In particular, cutting the
capital gains tax would stimulate entrepreneurship, risk-taking, innovation,
new business startups and venture capital. In the initial draft of the CBO report, there was no mention whatsoever
of these potential channels through which a reduction in the capital gains
tax might impact on economic growth. It was only grudgingly acknowledged
in the final draft, although ultimately dismissed on the grounds that such
effects cannot be estimated by the computer models. The impact of entrepreneurial activity need not be large to be meaningful,
however. Given that the CBO estimates GDP will be more than $108 trillion
over the next ten years, the economy will only have to grow 0.17 percent
faster to completely pay for the estimated $40 billion revenue loss from
H.R. 4125. Moreover, a revenue loss can easily become an increase (see figure).
Last year, Congress's Joint Committee on Taxation (JCT) estimated that
a reduction in the capital gains tax from 28 percent to 20 percent would
cost the Treasury $22 billion over 10 years. After this legislation took
effect, however, the JCT revised this loss into a $47 billion revenue
gain -- more than enough to pay for Mr. Gingrich's new tax cut. In other words, combining the two tax cuts together would only reduce
capital gains revenues to what was previously expected without any tax cut
at all. Some people would call this a free lunch. Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis,
August 24, 1998. Home | Support Us | All Issues | Social Security Debate Central | Contact Us |
