Opinion Editorial | |
| Wednesday, June 24, 1998 | |
Cutting the Middle Class Capital Gains Tax |
Today, House Speaker Newt Gingrich (R-Ga.) will introduce legislation
cutting the long-term capital gains tax from 20 percent to 15 percent.
For taxpayers in the 15 percent income tax bracket, the capital gains tax
rate would fall from 10 percent to 7.5 percent. Gingrich also will propose
reducing the holding period to get the lower tax rate from 18 months to
one year. It is safe to assume the Clinton Administration will denounce
Gingrich's proposal as a give-away to the rich and a budget-buster. Neither
charge will be true. First, it is important to know that capital gains are no longer reserved
solely for the rich. According to a 1997 study by the Congressional Budget
Office, half of all U.S. families now own assets such as stocks, bonds,
businesses and real estate that can generate capital gains. Over a 10-year
period, one third of all taxpayers reported capital gains or losses. Nearly
two-thirds of these had incomes under $50,000. Furthermore, the proportion of moderate income taxpayers reporting capital
gains is sharply rising. A key reason is the increasingly large number
of Americans with investments in mutual funds. In the past, investors generally
bought individual corporate stocks. As long as they did not sell them no
taxes were paid on any gains, no matter how much the stock price increased.
And when investors did sell and realized their gains they could often offset
them by selling other stocks with losses, thereby minimizing or even negating
a tax liability. However, as more and more Americans have invested in mutual funds, which
may consist of hundreds of different stocks, they no longer have as much
flexibility on how and when they will realize capital gains. That is because
the fund manager decides when to buy and sell stocks, not the individual
investor. As a consequence, at tax time each year millions of investors
suddenly discover that their mutual funds generated significant taxable
capital gains, even though they themselves never sold a single share of
their funds. Thus, as a result of investing in mutual funds rather than individual
stocks, millions of Americans have now unintentionally been drawn into the
capital gains tax net. According to the New York Times, between 1988 and
1994 taxpayers reporting only gains on mutual funds increased their capital
gains realizations by 200 percent. By contrast, those with other capital
gains saw a decline in realizations. The rich, meanwhile, can afford to have their assets individually managed
by professional portfolio managers who take their personal tax situation
into account, by offsetting gains with losses and other tax-avoidance techniques.
Such strategies are generally unavailable to investors with modest assets.
As a consequence of these trends the capital gains tax has become more
of a middle class tax than one on the rich. As to a cut in the capital gains tax being a budget buster, the evidence
of the 1997 capital gains tax reduction already indicates otherwise. That
cut, contained in last year's budget deal, lowered the top rate on long-term
capital gains from 28 percent to 20 percent. Now, in a June 11 memo, Congress's
Joint Committee on Taxation estimates that this legislation will increase
capital gains realizations by more than $1 trillion over the next 10 years.
Consequently, rather than enlarging the deficit, the 1997 capital gains
tax cut will actually increase federal revenue by $47 billion. In a study published by Congress's Joint Economic Committee last year,
economists James Gwartney and Randall Holcombe of Florida State University
estimated that the tax on capital gains that maximizes revenue is 15 percent.
This suggests that the Gingrich plan may well lead to a further increase
in federal receipts. Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis,
June 24, 1998. Home | Support Us | All Issues | Social Security Debate Central | Contact Us |