Few among Washington's movers and shakers spend their leisure hours
contemplating the intricacies of multilinear regression analysis.
But many do appreciate the value of arcane economic research that
delivers an easily understood political message.
That's why the Treasury Department's research paper No. 8801,
``The Direct Revenue Effects of Capital Gains Taxation,'' made
headlines earlier this month. By offering evidence that a halving
of the tax rate would increase federal revenue, the authors breathed
new life into George Bush's best known campaign proposal. What true
blue American could oppose a tax cut that cost the government
These results are not destined to be the last words on the
subject. Neither supply-side enthusiasts from the Treasury's
economics division nor anyone else actually knows whether the volume
of realized capital gains would rise sufficiently to offset the
effect of a much lower tax rate. And even if the supply-siders are
right, total tax revenues could fall as investors finagled to convert
ordinary dividend income into lesser taxed capital gains.
One way to break what now appears to be a political as well as
intellectual deadlock would be to pair the capital gains proposal
with another change in the tax code that offsets any conceivable
revenue loss. An obvious candidate: elimination of the provision
that allows individuals to pass on appreciated property to their
heirs without paying any tax on the capital gain.
Economists including Martin S. Feldstein, a former adviser to
President Reagan, and Joseph Minarik, a principal designer of the
Tax Reform Act of 1986, have been quarreling over the likely revenue
effect of a reduction in capital gains tax rates for nearly a
decade. But the debate seemed to take a decisive turn politically
last March when the bipartisan Congressional Budget Office estimated
that a cut in the current 33 percent maximum rate to 15 percent would
cost the Treasury $4 billion to $7 billion annually.
With the Federal deficit pushing $165 billion, few members of
Congress are eager to vote for any budget-busting tax measure, much
less one whose direct benefits would go mostly to people with
incomes above $100,000.
Hence the significance of the new report, prepared by a group
under Michael Darby, assistant Treasury secretary for economic
policy. Darby grafted simulation techniques used in a 1985 study by
the Treasury's tax analysis division to the basic statistical model
of taxpayer behavior estimated by the budget office. …