Opinion Editorial | |
| Monday, July 12, 1999 | |
A No Cost Capital Gains Tax Cut |
Probably no area of tax policy is more contentious than the capital gains tax. In a few days, the fireworks are likely to go off again when congressional Republicans push for a further reduction in the capital gains tax. Such a provision will almost certainly be included in the tax bill Republicans hope to pass before the August recess. A new study supports their efforts.
In 1989, Democrats in Congress blocked President George Bush's effort to cut the capital gains tax from 28 percent to 20 percent. Their main argument was that capital gains should be taxed the same as other forms of income, such as wages or dividends. At that time, the top income tax rate was 28 percent. However, when Mr. Bush broke his tax pledge in 1990 and raised the top income tax rate to 31 percent, Democrats kept the top capital gains rate at 28 percent. They also retained the 28 percent capital gains rate when Bill Clinton further raised the top income tax rate to 39.6 percent in 1993.
Having conceded the principle that there should be a lower tax rate on capital gains, Democrats reluctantly went along with a cut in the capital gains rate to 20 percent in 1997. (The rate will fall to 18 percent on assets purchased after the year 2000.) Although lacking any principled reason to oppose a capital gains tax cut, Democrats still argued that it was a bad idea. It would cost the federal government revenue, they said, and would do nothing to stimulate the economy. It was just a give-away to the rich, who realize most capital gains.
A new study of the 1997 legislation by Standard and Poor's DRI, a respected economic consulting firm, shows that the opponents were wrong. The tax cut stimulated both economic growth and higher stock prices. As a result, the study concludes that the cut in the capital gains tax -- which was estimated to lose $275 billion over 10 years -- will not cost the Treasury anything. The additional revenues from higher stock prices, greater turnover and faster growth will offset 100 percent of the revenue loss from a lower rate and taxpayers' reclassifying ordinary income into capital gains (see figure).
In recent testimony before the House Ways and Means Committee, Mark Bloomfield of the American Council for Capital Formation, which sponsored the DRI study, said that it supports a further cut in the capital gains tax rate. Most other major countries already tax capital gains at a lower rate than the U.S., he pointed out. In Britain, for example, the top rate is just 10 percent and in Germany there is no capital gains tax.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 12, 1999.
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