Budget Summit Sticks on Capital-Gains Tax Cuts Republicans Seek Cut to Stimulate Economic Growth; Democrats Argue for More Progressive Tax Structure

Article excerpt

THE toughest single sticking point in the top-level negotiating over the federal budget has been whether to cut the tax rate on capital gains income.

President Bush has pushed hard throughout his presidency to cut this tax rate, showing a determination he has reserved for few domestic issues.

It has become emblematic of the different priorities of the Republican and Democratic leaderships on tax questions.

The Republican emphasis is on economic growth, hence on using taxes to create a strong investment climate.

The Democratic emphasis is on fairness, hence making sure that the tax burden does not shift onto middle- and lower-income families.

The Democratic leadership in Congress was very nearly embarrassed on the issue a year ago when they failed to hold the party ranks behind them. Majorities in both chambers approved the capital-gains tax cut, but it was stopped in the Senate on a rule requiring a larger majority.

This summer, however, Democrats have grown confident enough to argue for progressivity. The evidence is clearer that the economic expansion of the 1980s did not trickle down to the 40 percent of households by income. Middle-income families held their ground only by sending more members of the family into the work force.

Yet the threat of recession has raised the urgency of the growth argument as well. Cutting the capital gains tax, according to its supporters, would lower the cost of capital needed to launch new ventures and expand existing companies, creating jobs and raising productivity.

Lowering the rate from 28 percent to 19.6 percent, as the White House has proposed, would add 0.6 percent to the gross national product, according to Michael Boskin, chairman of the president's Council of Economic Advisers, in congressional hearings last spring.

Yet the staff of the congressional Joint Committee on Taxation calculates that 66.1 percent of the benefit of this tax cut would fall to people with incomes above $200,000. People who earn more than $100,000 would receive 83.1 percent of the benefits.

In some cases, these are people who normally have far lower incomes but have a very high one-time capital gain during the year they sell their house to retire to a less expensive condominium, for example. But, in general, capital gains are skewed toward the wealthy. Since 1986, capital gains have been taxed exactly like ordinary income - a break with longstanding tax policy. At least since the 1930s, capital gains have been taxed at a lower rate, according to US Chamber of Commerce tax-policy manager David Burton. …