Will cutting capital gains taxes help spur needed investment?
That question is taking on increasing importance these days in the face of a mounting battle over the capital gains issue between Congress and the White House.
After a major flap with the administration, the House already has passed a sizable cut in capital gains taxes as part of its big tax cut bill, and the Senate Finance Committee is considering enlarging it even more.
President Carter has opposed the move, primarily on grounds of equity. Carter has argued from the start that capital gains already receive preferential treatment in the tax code, and that, if anything, the law should be tightened.
At one point, he threatened to veto any bill that contained the cuts that the House eventually passed.
But to many economists, the real issue isn't over fairness.It's how much a cut in capital gains taxes would do for the economy - specificially, by making more capital available to spur business investment.
And on that, the answer still is unclear.
For a start, both liberal and conservative analysis generally agree that reducing capital gains taxes isn't the most efficient way of stimulating - more investment - either in stocks or in new plant and equipment.
A sizable cut in corporate taxes - such as the administration first proposed - probably would provide more bang for each tax dollar, analysts say. So might a limited increase in the investment tax credit.
The major case for cutting capital gains taxes is the hope that it would provide more incentive for Americans to make more of their capital available to businesses - particularly the high-risk ventures that aren't blue-chip buys.
Proponents argue that cutting capital gains taxes also would help stimulate more turnover of existing stocks. In many instances, investors hold onto their assets too long solely because they want to avoid the accrued taxes.
But there are some serious questions here, too. For one thing, profits from the sale of corporate stocks constitute only about 28 per cent of the total capital gains now being reported by taxpayers.
So, trimming capital gains taxes not only would encourage more investment in the stock market. It also would use tax dollars to push so-called "non-productive" ventures such as real-estate and cattle-feeding.
No doubt the "unlocking" effect on stock holdings would be a benefit for the economy. But in some cases, these would lead only to a shift in ownership rather than to new net investment. And the initial might fade.
So the answer seems to be a wash. Cutting capital gains taxes probably would help the economy substantially more than Carter has conceded, but not nearly so much as proponents of the break assert.
The rub is in the way the House went about trimming capital gains taxes - with a formula that has troubled those who have not yet expressed concern about the equity issue, and gives away too much of the store.
Treasury Secretary W. Michael Blumenthal has raised criticisms about three aspects of the House-passed bill:
It would seriously erode the impact of the "mininum tax" that now is assessed on the excluded portion of a capital gain. As a result, high-income taxpayers with large amounts of tax-sheltered "losses" could escape taxes.
It would provide a new "inflation adjustment" for capital gains taxes that Blumenthal says would help build inflation into the economy, and eventually would wipe out half the revenues from capital gains taxes.
It would provide a generous - and some say unneeded - tax break for homesellers, who already enjoy special tax treatment not given to other taxpayers. Blumenthal wants this provision cut back to apply only to retires.
The question is how to reshape the House measure. Sen. Russell B. Long (D-La.), chairman of the Senate Finance Committee, has come up with one proposal - to revive a Kennedy administration plan Congress rejected in 1964.
Under Long's idea, Congress wouldn't actually change capital gains tax rates - merely trim back the amount of a capital gain that is subject to taxation, say to 30 per cent from the current 50 per cent.
At the same time, he also would stiffen the minimum tax now levied on the excluded portion of a capital gain. Although there still is no formal legislative proposal, Long has suggested a 20 per cent minimum tax, from 15 per cent now.
Sensibly, the administration has stopped fighting Congress' but for cutting capital gains taxes, and has begun concentrating instead on how to shape the reduction so it does the most good.
The issue is an emotion-filled one, in which both sides so far appears to have made claims they can't fully substantiate. The fact is, nobody knows what cutting capital gains taxes will accomplish, and so caution might be in order.