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Capital Gains Tax Cut Plan Doesn't Add Up for Some (Washington Post, June 25)

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Budget Special Report

Gingrich: Slash Top Capital Gains Tax Rate

By Eric Pianin
Washington Post Staff Writer
Thursday, June 25, 1998; Page A04

House Speaker Newt Gingrich (R-Ga.) yesterday presented a potentially costly plan to slash the top capital gains tax rate on investors for the second time in two years, even as his party frets over how to pay for another election-year promise of major tax relief for married couples.

House and Senate Republican leaders already are negotiating over tax cuts in the $60 billion to $100 billion range over five years in the form of elimination of the so-called marriage tax penalty, but are far from agreement over how to pay for it. House GOP leaders favor corresponding cuts in domestic programs, but Senate budget leaders refuse to go along with that approach.

Speaking at a large GOP gathering resembling a cross between a college economics lecture and a political pep rally, Gingrich said another reduction in the capital gains tax rate would "supercharge" an already muscular American economy and unleash a tidal wave of untapped capital gains that would run up government revenue and more than offset the cost of the tax cut.

Congress last year reduced the maximum capital gains rate from 28 percent to 20 percent. Under Gingrich's plan – to be offered in September as part of a GOP tax package – the top rate would be further reduced to 15 percent while the rate for lower-income investors would be cut from 10 percent to 7.5 percent.

"It removes the high-tax shackles from the risk-takers, the investors and the entrepreneurs who drive our economy's growth," he said. "And when nearly half of all Americans own stock, it is a powerful motivation for every American to save and invest."

Senate Majority Leader Trent Lott (R-Miss.) indicated he will introduce a similar bill after the July 4 recess. But White House officials, Hill Democrats and some congressional budget and tax analysts took a dim view of Gingrich's proposal.

"I'd certainly like to see the numbers," said Rep. John M. Spratt Jr. (S.C.), ranking Democrat on the House Budget Committee. "While it may unlock some [stock] transactions in the near term, it's hard to see how it pays for itself over the long term."

Gingrich's proposal has rekindled a decades-old debate over the economic and budgetary effects of lowering the tax rate on the net gains from the sales of stocks and other major assets. Essentially, Republicans say that such cuts spur investment and economic growth while Democrats charge it is little more than a giveaway to wealthy investors.

"It's a typical Republican gimmick of treating upper-income people to a tax break," said Sen. Byron L. Dorgan (D-N.D.).

The speaker's proposal will put enormous added pressure on the Congressional Budget Office and the Joint Committee on Taxation – the two analytical arms of Congress – to see the tax cut as a revenue-raiser.

Gingrich and other conservatives have mounted a withering attack on the CBO and Joint Tax Committee for repeatedly underestimating growth in the economy and government revenues. Gingrich claims, for example, that the Joint Committee in January 1997 understated by $47 billion how much last year's cut in the capital gains tax would generate over the coming decade – an interpretation committee officials said gives far too much credit to the effects of the tax cut and not enough to a bullish stock market and booming economy.

"We have to win an intellectual argument in this city and with the elite media" over the economic power of reducing the capital gains, Gingrich said. "Any stagnant model is the equivalent of the Flat Earth Society."

GOP leaders want the budget analysts to use a forecasting model called "dynamic scoring." This would take into account human behavior and presume that the tax cut would not only spur stock sales but create more wealth and consumer spending, adding to government revenue.

Gingrich and other GOP leaders have been hoping for a "July surprise" in the form of revised CBO estimates showing budget surpluses much higher than the $43 billion to $63 billion CBO is forecasting this year, followed by $39 billion in fiscal 1999 and nearly $80 billion by 2002. Some GOP leaders said if revised surplus figures were considerably higher – as much as $100 billion to $300 billion a year through early in the coming century – Congress could use part of it for tax cuts and the rest to bolster Social Security.

But CBO officials cautioned this week that lawmakers expecting a dramatic shift in the budget picture are in for a disappointment.

Gingrich told GOP lawmakers his plan would provide a strong plank to run on this fall. But Business Council chairman Larry Bossidy said the GOP leadership would be foolish to try to campaign on the issue. "You can't sell it to the country," Bossidy said. "It's perceived as something that's only for fat cats."

Staff writer Clay Chandler contributed to this report.

© Copyright 1998 The Washington Post Company

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