Preservation of low tax rates on capital gains has become a focal point of business lobbying on tax simplification, and both Congress and President Reagan are showing signs of paying attention.
Ninety-two members of the House yesterday sent a letter to Reagan asking that he preserve lower rates for capital gains, which are profits from the sale of capital assets such as real estate or stocks.
The Treasury Department's tax-simplification proposal issued last November would do away with the exclusion of 60 percent of long-term capital gains, thus taxing capital gains at the same rates as ordinary income. But those rates would be reduced to 15 percent, 25 percent and 35 percent and capital assets would be indexed so that taxes would not be paid on an increase in value because of inflation.
Despite that indexation, Reagan has showed signs he favors keeping the capital-gains differential. On Thursday, he told the Wall Street Journal that ending the differential could reduce funds for venture capital and that "this'll be one of the points that will be very much discussed." Treasury is in the process of revising its plan, in conjunction with congressional supporters of tax simplification, to arrive at a package Reagan will support.
Reagan also showed his feelings about capital gains in a White House meeting last Tuesday with 28 executives of high-growth firms. According to some who were present, he said that every time the capital-gains rate has been lowered, capital formation has increased, investment has risen and productivity has gone up. The conversation was not about the Treasury plan per se, but business lobbyists were encouraged.
"He said it with some vigor," said Jack Albertine, president of the American Business Conference, an organization for high-growth firms. "He gave the impression he had a lot of concern about raising the capital-gains rate."
Business groups, fearful of losing investment funds, also have sent a flurry of letters to the Treasury Department protesting the proposed change for both individuals and corporations.
The letter from the members of Congress said that taxing capital gains at the same rate as ordinary income "would certainly stifle risk-capital investing and restrict the supply of capital for entrepreneurial enterprises." Fifteen of the signers are members of the 36-member House Ways and Means Committee. Separately, two senators and another House member also have protested the capital-gains change in letters to the administration.
"If he [Reagan] puts in practice what he has said publicly, I would think we would be able to get consideration for [dropping] the capital-gains tax portion" from the simplification proposal," said Rep. James Jones (D-Okla.), one of the originators of the letter.
Congress, which has reduced the effective capital-gains rate twice since 1978, last year gave owners of capital assets another break. The Deficit Reduction Act reduced the period for which assets must be held before the lower rate applies from a year to six months. Another factor might make legislators and the administration inclined to preserve the differential: The revenue cost of doing so is not very high.
"I'm now convinced we have a majority [on the committee]," said Mark Bloomfield, executive director of the American Council for Capital Formation, a business lobbying group. "I know there are three to five others" on the panel who oppose ending the differential.
Despite the strong contentions that low tax rates encourage investment in risky new businesses, however, figures show that most of the funds flowing into new firms come from organizations tha pay no taxes at all.
In 1984, for example, 34 percent of the funds that went into independent, private venture capital firms came from pension funds, which pay no taxes. Another 6 percent came from tax-exempt foundations and an additional 18 percent from foreign investors. About 42 percent came from various tax-paying sources.