On June 30, President Clinton finally released his plan for cutting taxes this year. He said he was moving in the direction of the Republican tax bills by embracing a cut in the capital gains tax. However, Treasury Secretary Bob Rubin was less than enthusiastic about the idea. It would be better not to cut the capital gains tax at all, he said, because the predominant view among academics is that it is "unlikely to produce much economic benefit."

In fact, this is not the predominant view among academics. It is not even the predominant view among Treasury's own experts on capital gains. All Secretary Rubin had to do is read the studies of capital gains published by the Treasury itself, or look at some of the many papers published by Treasury economists in respected academic journals. Uniformly, they show that the capital gains tax has very powerful economic effects.

• For starters, Secretary Rubin should look at Treasury's 1985 report to Congress on the 1978 cut in the capital gains tax.

• The report concluded that it resulted in "increases in economic growth, capital formation, productivity, and long-run consumption levels."

• Moreover, the report stated, all income groups benefited from the tax cut "due to the increase in productivity associated with a larger capital stock."

• Rubin should also talk to Robert Gillingham, Treasury's ranking authority on the capital gains tax, who is deputy assistant secretary for economic policy.

In 1989, Gillingham co-authored a paper on capital gains published by the Treasury Department which concluded that there is "strong evidence of responsiveness to capital gains tax rates."

The marginal tax rate on capital gains, Gillingham wrote, "has a significant and powerful negative impact both on the proportion of taxpayers realizing gains and on the value of capital gains declared by realizers."

In a 1992 paper published in the "National Tax Journal," Gillingham and another Treasury economist, John Greenlees, looked at the impact of cutting the capital gains tax on federal revenues.

They found that increased economic activity resulting from a cut in the capital gains tax could easily cause the tax cut to pay for itself.

The weight of evidence, they concluded, "does not suggest...that a reduction in the capital gains tax rate from existing levels would decrease tax revenue."

Another Treasury economist who has looked carefully at the economic effects of capital gains taxes is Gerald Auten, a career economist in Treasury's Office of Tax Analysis.

In a 1989 paper published by Treasury, Auten refuted several studies that had found no impact from cutting the capital gains tax.

Instead, he found that the potential response by taxpayers to a cut in the capital gains tax was "sufficiently large to support claims that lowering capital gains tax rates would increase Federal tax revenues."

In a 1991 paper published in the "Journal of Economic Perspectives," Auten reviewed much of the research on capital gains taxation and cited many studies showing significant effects on saving, investment, risk-taking and entrepreneurship.

Finally, Secretary Rubin might talk to his predecessor, Lloyd Bentsen, about the economic impact of capital gains taxes. During his long career in Congress, Bentsen was a consistent supporter of lower capital gains taxes. He often said that reducing the capital gains tax was essential to increasing investment and productivity, which are the keys to higher growth and rising standards of living.

In conclusion, Secretary Rubin is simply wrong on what experts think about cutting the capital gains tax. All he has to do is talk with those he has working at Treasury to see that there is considerable research showing the positive economic benefits of cutting the capital gains tax.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 9, 1997.