GOP Set to Push through Cut in Capital Gains Tax 'Contract' Proposal Targets Investment Taxes and Regulation, but Critics See Only a Return to Deficit-Boosting, Supply-Side Reagonomics Series: REPUBLICAN ROAD MAP

By Abraham McLaughlin, Monitor | The Christian Science Monitor, December 19, 1994 | Go to article overview

GOP Set to Push through Cut in Capital Gains Tax 'Contract' Proposal Targets Investment Taxes and Regulation, but Critics See Only a Return to Deficit-Boosting, Supply-Side Reagonomics Series: REPUBLICAN ROAD MAP


Abraham McLaughlin, Monitor, The Christian Science Monitor


CAPITAL gains.

For Republicans, it is the El Dorado of tax cuts, enabling business, entrepreneurs, and property holders to reinvest more of their profits and thereby spur the economy.

For Democrats, it is a "trickle-down" nod to the rich that will inflate the deficit.

After a decade of debate, its time may have come.

House Republicans have included a capital-gains tax cut in their "Contract With America," a 10-point agenda they vow to bring to a vote in the first 100 days of the new Congress.

With the Republican transition on Capitol Hill, two ardent supporters of the cut now preside over the committees that have jurisdiction: Rep. Bill Archer (R) of Texas in House Ways and Means, and Sen. Bob Packwood (R) of Oregon in Senate Finance.

And President Clinton intends to reintroduce his plan for a "targeted" capital-gains tax cut, the more selective approach that he pushed last year.

The Republican proposal, called the Job Creation and Wage Enhancement Act, targets investment taxes and regulation.

The act would reduce the capital-gains tax -- the tax on profits from stocks, bonds, art, and other investments -- by 50 percent, and index capital gains to inflation. If the measure passes, individuals would pay a maximum 19.8 percent tax on capital gains, down from the current 28 percent. Companies would pay 17 percent, down from 35 percent.

Republicans say the plan would cost $56 billion in lost revenue over five years, but are vague on how to pay for it.

Does the act signal a return to the "cut taxes, cut spending" days of supply-side Reaganomics? Agreement among economists splinters over the tax cut's long-term effect on the economy.

"The supply-siders" -- economists ascendant during the Reagan era -- "say the effect will be immediate and large," says Barry Bosworth, an economist at the Washington-based Brookings Institution. He disagrees. "Capital is very important to output, but the effect on output takes many years to build up."

The Republican plan also would allow big business essentially to avoid taxes on investments in plant and equipment through a "neutral cost recovery" provision; increase the deductions for new small businesses from $17,500 to $25,000; ease the transfer of family businesses from one generation to another by raising the estate-tax exemption from $600,000 to $750,000; and decrease regulation and end "unfunded mandates" -- all to create jobs and increase wages.

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GOP Set to Push through Cut in Capital Gains Tax 'Contract' Proposal Targets Investment Taxes and Regulation, but Critics See Only a Return to Deficit-Boosting, Supply-Side Reagonomics Series: REPUBLICAN ROAD MAP
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