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
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
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
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
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. …