Capital Gains Deal: Tax Cut for Rich, or Economic Spur?

Article excerpt

FOR two decades, the capital-gains tax has risen and fallen with the political mercury in Washington.

Republicans have long argued that cutting the tax on profits made on the sale of stocks, bonds, and real estate will free up money for new investment and boost economic growth. Democrats have called it a tax break for wealthy Americans. Economists are as divided as the politicians over how much impact a capital-gains cut has on the economy.

But the latest live test of who's right is about to begin again. Earlier this week, as part of the budget negotiations, President Clinton accepted in principle a capital-gains tax cut.

The White House endorsement, however reluctant, comes from a "president who recognizes that while he's busy accusing us of catering to the rich, there's an economic benefit to reducing the penalty on investment," says a GOP strategist on Capitol Hill. It's also politically expedient, he says

What Clinton got in return for the capital gains cut isn't clear yet. But this Republican says, "Bill Clinton needs a spur to what could be a very slow economy. A lower cap gains rate will help the construction industry, homebuilding, and other key sectors already lagging."

The current maximum capital-gains tax takes a 28 percent bite out of the profits made by individuals and 35 percent from corporate profits. Republicans have pushed for a reduction to 19.8 percent and 25 percent respectively.

Clinton first entertained the possibility of a capital-gains cut last spring, but he spoke of one restricted to taxpayers who had held their investments for a minimum of five years. He wanted to discourage investors from diving in and out of markets.

The decision to go along with a cut is already stirring debate over the predicted benefits.

"It won't have any kind of spectacular impact on economic growth," says economist Rudolph Penner, director of the Congressional Budget Office from 1983 to 1987.

He says "the lion's share" of capital gains already escape taxation. …