When Congress was considering a cut in capital gains tax rates last year, those promoting the legislation made some pretty heady predictions about what it would accomplish.
Although the reduction primarily benefits high-income investors, conservatives argued confidently it would spur the economy by encouraging new investment, both in stocks and in new ventures.
In the most celebrated of such projections, Chase Econometrics, Inc., forecast the cut would begin to boost stock prices immediately, eventually pushing them up a staggering 40 percent over two years.
It seemed almost a promise of magic. If capital gains taxes fell, prosperity certainly could not be far behind.
Ultimately, the lawmakers bought the idea fully, slashing the maximum tax rate on capital gains from the 49.1 percent paid by a handful of high-income investors to a new rate of 28 percent.
Expectations were so high that the Senate Finance Committee, fearing a slump if the reduction were delayed too long, rushed to make most of the cut effective last November, not even waiting for the House's Jan. 1 date.
Jan. 1, however, still brought a second present for investors; The "minimum tax" -- enacted in 1969 to prevent well-sheltered investors from escaping taxes altogether -- was watered down.
The capital gains reductions had three major goals:
Proponents argued that previous law was so onerous that high-income investors too often simply hung onto stocks and other assets that they otherwise would sell, because of the large tax bite.
The capital gains reductions were designed to eliminate this "lock-in" effect by trimming back the taxes a seller would have to pay on any profits he makes. The unlocked gain then would be re-invested.
The 1969-76 increases in capital gains taxes were said to discourage investments in high-risk industries such as electronics, crimping the ability of these firms to attract the "venture capital" they need to expand.
The cuts in capital gains were intended to entice more investors into high-risk industries, eventually resulting in a rash of new inventions and an improvement in productivity.
All this was supposed to send the stock market rising, enabling business to raise the capital it needs -- through new stock issues -- for investmentin new plant and equipment, and creating more jobs and output in the process.
Sponsors of the measure were forecasting an immediate response by the markets to the capital gains reductions. To hear proponents tell it, the stage appeared to be set for an immediate boom.
Well, both those dates have come and gone, and the results of the capital gains changes are proving to be mixed.
Brokers report some evidence that the cut is beginning to have one of its intended effects -- to help "unlock" the holdings of stocks and other assets that investors have held too long for fear of a harsh tax bite.
Although any judgments still are very preliminary, the feeling is the move has begun to make some impact in freeing up long-held assets.
But there still is no sign of the highly touted boom.
Charles Brunie of Oppenheimer & Co. believes the tax cuts have had an effect on the market -- but it came last year. "There's no way you would have had that rally from March to October without capital gins,"he says.
Brunie thinks that the rebound last spring and summer stemmed mostly from investors' expectations of the coming cut. The actual reductions, on the other hand, have had relatively little impact.
Instead, he concedes, there's been relatively little impact on the market since the Nov. 1 effective date. "If I had to look at it,"he said, "I would have to say no."
If Brunie is right, what the voters have gotten so far from the capital gains tax cuts Congress enacted last year is not a boom, but only a mild pop -- not enough to offset much of the billions the tax reductions cost.
The question is, how much more impact will the 1978 reductions have? If the results so far are only a beginning, the cuts may be worth it. But if what we've seen is all we're apt to get, then the judgment is quite different.