Cut capital gains - now!

USA Today (Society for the Advancement of Education), Sept, 1995 by Jeff A. Schnepper

ACCORDING TO the spring edition of the Internal Revenue Service's Statistics of Income Bulletin, issued June 7, 1995, total individual income taxes were $501,200,000,000 for 1993, passing the half-trillion-dollar mark for the first time. This was a 5.3% increase from 1992, when total income taxes were $476,000,000,000, and resulted in a large part because of higher marginal tax rates on upper-income individuals.

For 1993, the over-all average tax rate rose from 13.1 to 13.5%, up almost four percent. The Washington-based Tax Foundation predicts further increases. The Foundation recently released a study showing that Federal, state, and local governments are expected to collect more taxes in 1995 than ever before. Total tax collections for 1995 are projected to equal $2,183,000,000,000--5.7% more than 1994 and 30% above 1990.

Individual income taxes will make up about one-third of all tax receipts, at $719,000,000,000. Conducted by economist Patrick Fleenor, the study showed that the Federal government will take the largest bite--66%, or about $1,436,000,000,000. Yet, the Federal government never seems to have enough money.

In light of all of this, though, Congress is thinking of instituting tax cuts. The fact that members of our government are thinking in itself astounds me: that they actually have a good idea is absolutely amazing!

Members of the House Ways and Means Committee see a reduction in the taxation of capital gains as providing potential benefits to all individuals, not just the wealthy. They insightfully recognize that economic growth benefits every American. Cutting the taxes on capital gains reduces a disincentive for capital formation. More capital formation will promote greater corporate expansion, which, in turn, will provide ever-improving opportunities for families.

The Ways and Means Committee believes it is important that tax policy be conducive to economic growth. This can not occur without savings, investment, and the willingness of individuals to take risks and exploit new market opportunities. The larger the pool of savings, the more money there is available for business investment in equipment and research, so that the economy can increase output and productivity. More jobs are created and, through increases in productivity, workers earn higher real wages. Through greater savings and investment, all Americans will benefit from a higher standard of living.

The net personal savings rate in the U.S. averaged 4.8% of gross domestic product (GDP) during the 1980s. This was below the 5.5% rate of the 1970s and far below Japan, Germany, and Canada in the 1980s. The net personal savings rate reported by the Department of Commerce for 1990 through 1992 averaged just 3.5% of GDP. Such a rate is inadequate to finance the investment needed to provide the nation's businesses with the equipment and research dollars necessary to create higher productivity.

American technological leadership has been enhanced by the willingness of individuals to take the risk of pursuing new businesses exploiting new technologies. Such risk-taking is stifled if the taxation of any resulting gain is high and the ability to deduct losses limited. Encouraging risk-taking is paramount to economic growth, and reducing taxation of capital gains will have that effect.

The taxation of capital gains upon sale encourages investors who have accrued past gains to keep their money "locked-in" to such investments even when better opportunities present themselves. Reducing the rate of taxation on capital gain, will encourage investors to unlock many of these gains and, in turn, permit more money to flow into new, highly valued uses in the economy. When money can flow freely, with minimal tax impact, the efficiency of the capital markets is improved.

This unlocking effect should have the short- and long-term effects of increasing revenues to the Federal government. Some observers have projected revenue losses to the government due to capital gains tax reduction. However, they fail to consider the potential for accelerated growth in GDP that would result from more savings and risk-taking. Many macroeconomists have concluded that reductions in the taxation of capital gains will increase GDP and wage growth sufficiently that future tax revenues from taxation of higher wages and business profits will offset the losses forecast from the sale of capital assets. For instance, Allen Sinai, chief global economist at Lehman Brothers, has estimated that a reduction in capital gains taxation would raise real and nominal gross domestic product by increasing capital spending and capital formation and, thereby, boost future government revenues.

Frequent mention has been made of the "failure" of supply side economics in reducing the deficit. What failure there has been lies only in the non-recognition of what really happened. In fact, when tax rates were cut, revenues increased. These increases were more than offset, though, by uncontrolled spending by Congress, and the deficit worsened. The concept of reducing taxation to stimulate capital fommation and job creation consistently has been shown to work.