Look for a Cut in Capital-Gains Tax in '97

Article excerpt

Regardless of who wins the elections next month, some sort of a cut in the capital-gains tax rate is almost certain to be enacted next year.

It's inevitable. Washington has finally come around on this issue, on both sides of the aisle.

And, despite the naysayers who don't like or believe supply-side economic theory, a capital-gains tax cut is going to be a big boon to state and U.S. Treasury coffers alike.

Human beings respond to powerful, common-sense incentives, and a significant cut in the capital-gains tax rate is an unprecedented incentive to cash in locked-up investments.

Now, whether the new "windfall" revenue translates into a lower federal deficit or not will depend on who's spending the money. But there will be a windfall, perhaps of huge proportions.

How big will the windfall be? Well, when millions of taxpayers declare hundreds of billions of dollars in capital gains in the first year of lower rates, the states alone are likely to see their income tax revenues increase by an average of nearly 12 percent.

Because 40 states require taxpayers to report all capital gains declared on their federal tax forms, the sudden growth in capital gains could create a first-year state income tax windfall of $9.5 billion, according to a Heritage Foundation analysis.

These are not supply-side, pie-in-the-sky estimates. Historically, whenever the government has lowered rates on capital-gains taxes, there is a rush to declare gains. The additional revenue more than offsets the loss of revenue from the lower rates.

Basically, when rates are high - as they are now - taxpayers hold onto their appreciated assets. Because so many people in the country now expect a capital-gains tax cut, there is an even greater incentive to "lock up" their assets.

In fact, economists estimate there could be as much as $7.5 trillion in unrealized capital gains. Any alteration in the tax rate on these gains will unleash a torrent of tax revenue.

Last year, two tax economists from the Congressional Budget Office, Leonard Burman and William Randolph, estimated that for every 1 percent drop in the capital-gains tax rate, capital-gains realizations would rise by 6 percent.

In other words, if you cut the tax rate in half, capital gains realizations could soar by as much as 300 percent. That's probably too optimistic, but even if it's only half that amount it will still represent an unprecedented windfall in one-time tax revenue.

All of this flies in the face of the demagoguery by liberals who hate the prospect of a capital-gains tax cut. …