Cutting Taxes Gets Political

Article excerpt

SOME shifts in taxes - especially capital-gains taxes - are liable to emerge from the election-year gamesmanship under way here.

The partisan positioning that began with President Bush's State-of-the-Union address has grown as elaborate as the circling and stomping of Sumo wrestlers before contact.

For both the president and the Democrats running Congress, the next few weeks offer a choice between each side staking out on its own moral high ground or getting something done to stimulate the economy.

The widespread view these days is that the politically correct move is to get something done.

Congress needs to act or the public will say "a pox on both your houses," says Congress-watcher Norman Ornstein of the American Enterprise Institute.

And Mr. Bush is hearing advice that using Congress as a foil will ring hollow. For an incumbent president to argue, says Dr. Ornstein, I haven't been able to get anything done because of them. Reelect me that's not a very powerful theme."

Both Bush's short-term growth package and the one produced on Friday by the Democratic leaders of the House Ways and Means Committee include substantial cuts in the capital-gains tax.

Bush's proposal cuts the maximum tax rate on capital gains at about 16 percent. The exception is for about one household in 400 - the very wealthiest - that pay a 24 percent alternative minimum tax on all their income.

The Democratic proposal would not change the top rate on capital gains, but it would cut the taxes on investment profits in some small businesses.

More important, the Democrats would index capital gains to inflation. Roughly $10 billion of taxes each year are paid on apparent profits that are due solely to inflation. …