Could Capital Gains Tax Increase Federal Revenues?
Passell, Peter, THE JOURNAL RECORD
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 nothing?
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. …