The group included many members of the powerful tax-writing House Ways and Means Committee. One was Rep. James Otis “Jim” McCrery (R-La.). He formed the Committee for the Preservation of Capitalism, a political action committee that he used to give money to candidates favoring lower capital gains rates.
Treasury Secretary Robert Rubin wasn’t enthusiastic, but Clinton, seeking compromises with Congress, agreed to cut the capital gains tax rate to 20 percent.
“The irony is that Reagan got rid of the preferential rates for capital gains and Clinton put them back in,” Sullivan said.
Six years later, congressional Republicans and President George W. Bush teamed up to cut the tax rate again, this time to a historic low of 15 percent.
These changes drove down the overall tax rate paid by the wealthy. In 1996, before the capital gains cut under Clinton, millionaires paid an effective rate of 30.8 percent. By 2007, it was 22.1 percent.
Many tax experts contest the benefits of a low capital gains rate.
Jane Gravelle, a tax expert at the Congressional Research Service, says a rate cut could generate more government revenue for a year or two as investors take advantage of lower rates or a rising stock market, but she says that initial bump in tax revenue would fade. And the government, over time, would collect more overall if it kept the rate higher.
Greenspan would not comment for this story. But while he and others argue that the wealthy would save and reinvest their gains, thus spurring economic growth, other analysts say that result is not clear.
“Lower capital gains [taxes] are a mixed bag even if you’re just looking at efficiency,” said Leonard Burman, a professor at Syracuse University and former head of tax analysis at the Treasury Department. “It might encourage more risk-taking, but it also creates huge opportunities for tax shelters aimed at converting ordinary income to capital gains. People would make investments only because of the tax benefits.”
Moreover, he notes, given the recent financial crisis, it’s not clear that an absence of risk-taking is what’s ailing the economy.
Now, a new generation of presidential hopefuls — including Republicans Mitt Romney and Jon Huntsman Jr. — have begun rolling out their plans to lower or eliminate the capital gains tax.
Backing from Democrats
While Democrats have decried the GOP for protecting the wealthy from tax hikes, they have been champions of keeping taxes on investors relatively low.