Why GOP Is Pushing Capital-Gains Tax Cut

Unexpectedly, Washington has reopened one of the longest running economic debates of the modern era - whether it makes sense to lower the tax rate on money gleaned from the sale of stock and other big investments.

One reason this capital-gains tax has returned to the US Capitol's agenda is the explosion in the number of ordinary Americans, from hot-dog venders to reporters, who own equity mutual funds. Some 43 percent of adult Americans now invest in the stock market, according to one financial industry study -- double the level of seven years ago.

Republicans figure these folks might be part of a vast new constituency for continued capital-gains reduction. Democrats, however, believe their old argument still has sting: It's the rich - who have the most assets - who get the most dollars from such cuts.

New GOP capital-gains proposals "will overwhelmingly benefit those Americans who have already enjoyed the greatest rewards from the current economic expansion," said House Democratic leader Rep. Richard Gephardt of Missouri last week.

The unexpected nature of the capital-gains debate stems from the fact that Washington cut the tax just last year. The sweeping balanced-budget agreement included a reduction in the maximum capital-gains rate from 28 to 20 percent.

But the move also made the tax more complicated. At White House insistence, it lengthened the amount of time investors must hold assets to qualify for the lowest possible rate from one year to 18 months.

So late last month GOP leaders tacked language reinstituting the 12-month holding period onto an IRS reform bill. It appears their tactic will succeed, as President Clinton has indicated he will likely sign the popular IRS legislation when it reaches his desk sometime this summer.

Letting investors reap their gains faster is, in essence, a small tax cut. The Congressional Budget Office (CBO) figures the move will cost $2.1 billion over the next decade.

Now Republican leaders want to build on that reduction with a further sharp rate drop. At a flag-waving rally on June 24, House Speaker Newt Gingrich (R) of Georgia offered a plan to lower the top capital-gains rate to 15 percent. Senate majority leader Trent Lott (R) of Mississippi says he'll push a similar bill in his chamber later this year.

To Republicans, capital-gains cuts can be a major engine driving growth and investment. If investors are enticed by lower rates, goes this side of the debate, they will pour money into productive purposes, such as creation of businesses.

In fact, such reductions can more than pay for themselves by spurring growth, and hence more tax revenues, said Speaker Gingrich.

Last January, when the top rate was still 28 percent, the CBO figured Uncle Sam would collect $743 billion in capital-gains taxes in the next 10 years, Gingrich pointed out.

But a flood of incoming money has forced CBO to update its figures. Today, with the rate at 20 percent, CBO is predicting $790 billion in capital-gains revenues over the decade.

"This is a tax cut which actually gains money by inducing more people ... to sell," the Speaker claimed.

Not so, say opponents of such reductions. Sure, more capital-gains money is flowing into the IRS, they say - but that's largely because the stock market is going up like a firecracker, not because of the lower tax rate.

Lowering the rate may unleash some money, but most investors are already investing as much money as they can, say critics. That's how you get rich, after all.

It's true that the spread of stock ownership has increased the number of people who would benefit from a capital-gains reduction. But most of the dollars would still flow to the well-off, say many Democrats.

"Three-quarters of capital-gains taxes are paid by people who make more than $200,000 a year," says Robert McIntyre, head of Citizens for Tax Justice, a group that opposes capital-gains reductions.

The White House has already indicated its opposition to further capital-gains cuts, saying any extra cash should be devoted to saving Social Security instead.

There's not much time for GOP congressional leaders to push capital-gains cuts to fruition. Few days are left in the session, and there's lots of other work to do. Furthermore, their rules call for any tax bill to be paid for by savings or surplus.

For these reasons, "It's going to be difficult for them to get a tax bill of any kind passed," says Stanley Collander, a budget expert with the public-relations firm Fleishman-Hillard