Right data - capital gains tax

National Review, Jan 29, 1996 by Ed Rubenstein

Ed Rubenstein

Newt Gingrich wants to cut the top capital-gains tax rate to 19.8 percent. Most investors are salivating at the prospect. But many rich investors couldn't care less. They have ways to cash out without sharing a dime with Uncle Sam.

One popular technique is the "short sale." If you sell stock for, say, $1 million more than you paid for it, the government will normally take $280,000, or 28 percent of the gains. But if instead you borrow an equivalent amount of stock from your broker and sell it, the IRS assumes you still own the original stock and levies no tax. A wealthy investor merely pays a few points of interest each year to his broker. At his death his heirs can repay the loan with the original stock, thereby avoiding capital-gains taxes entirely.

Another stratagem has been to swap appreciated stock for an interest in a minority-controlled company. Viacom contemplated this affirmative-action loophole when it sold its cable-TV operations last year. Eventually, other ways were found to escape taxes on the multi-billion-dollar transaction.

No one knows how much revenue is lost through such tax strategies. One clear result, however, is a decidedly middle-class tilt to capital-gains taxpayers. In 1994 nearly 8 million taxpayers paid capital-gains taxes. Nearly three-quarters of them had total incomes of $75,000 or less; more than one-third earned less than $30,000.

Investors have been increasingly reluctant to take their gains since capital-gains tax rates went up in 1987. From 1987 to 1994, for example, the S&P 500 rose a whopping 95 percent, yet annual realizations fell by more than one-third. Economists at the Joint Economic Committee estimate that $1.5 trillion in accrued gains has been locked in or shunted into tax-free investment strategies since 1987.

So who would benefit from a capital-gains tax cut? Just about everyone. The GOP tax cut would add $2.2 trillion to the nation's capital stock by the year 2000, according to Gary and Aldona Robbins. More capital per worker means higher productivity, and that means higher wages. Recent history confirms this: Since the 1987 tax hike, average weekly private-sector earnings have declined 6 percent; in 1982 - 86 this measure had risen 1.8 percent.

People who suffer most from high capital-gains taxes, economist Jude Wanniski recently told the Senate Finance Committee, are "those who are furthest from the sources of capital" -- the poor, the young, those who are at the start of their careers. As a group, black Americans may have the most to gain. Blacks, notes Wanniski, constitute about 13 percent of the population, but have less than 1 percent of the nation's wealth.

The U.S. Civil Rights Commission agrees. A commission report found that the number of black-owned businesses nearly doubled between 1978 and 1987, a period during which the top capital-gains rate was slashed from 49 percent to 20 percent. Since the 1987 tax hike, that "expansion has slowed significantly."

If Republicans are going to cut entitlements, they must offer something in return. A capital-gains reduction would be a good start.

                                A RICH MAN'S TAX?
                                 (1994 Tax Year)
 Income              Taxpayers With             Net Capital Gains
 Bracket              Capital Gains     Amount       Average Gain
                    Number      %       ($Bil.)   %   Per Return
Under $30K         2,707,000   34.6      $9.2    9.2     $3,399
$30K - $50K        1,486,000   19.0       6.9    6.8      4,643
$50K - $75K        1,425,000   18.2       8.4    8.4      5,895
$75K - $100K         814,000   10.4       7.5    7.5      9,214
$100K - $200K        898,000   11.5      15.0   15.0     16,703
Over $200K           502,000    6.4      53.1   53.0    105,777
Total              7,832,000  100.0%   $100.1  100.0%   $12,781
    Source: IRS