Capitol gains - capital gains tax legislation

REASON prevailed over egalitarian rhetoric as 64 House Democrats defected from the McGovernite leadership, voting to reduce the onerous tax on capital gains. The benefits of a less punitive tax are well understood. High taxes have discouraged investors from selling assets, resulting in a loss of tax receipts. With tax rates on the immediate income from junk bonds now identical to those on the uncertain future gains from stocks in new companies, investors have begun preferring debt to equity. In response, companies have taken on dangerously heavy debts and retired equity through leveraged buyouts, thus reducing taxable profits as well as taxable capital gains. Against all this, the McGovernites had only two answers, neither of which could even persuade their own party. The first was that those who sell over $200,000 worth of assets in any given year are likely to have an "income" above $200,000, since the one-time capital gain was counted as regular income. In reality, the truly affluent are never compelled to liquidate their wealth, and can benefit from postponing the tax as much as from a lower rate. Those with modest incomes, on the other hand, often sell their stocks and their homes in order to acquire cash for retirement, or to put children through college. The "soak the rich" Democrats somehow continue to be amazed that hard-working voters are not delighted to see their life savings confiscated by a deadly combination of taxes and inflation.

A second line of defense, popularized by The New

Republic, was that genuine fidelity to the principles of laissez-faire should require conservatives to keep tax rates equal on all sources of income. While we are always eager to hear liberals' ideas regarding the proper interpretation of conservative economics, the idea is preposterous. For example, treating capital gains like any other income would require that capital losses be fully deductible from any sort of income. But liberal advocates of tax "neutrality" are certainly not demanding such even-handed treatment.

The proposed legislation is far from perfect. It would exclude 30 per cent of capital gains from taxation, but only through 1991, resulting only temporarily in a top tax rate below 20 per cent. Yet letting the tax rate jump back to 28 per cent in 1992 would both crash financial markets and slash tax receipts. The Senate should instead put a permanent 20 per cent ceiling on the capital-gains tax, even for those in a 33 per cent tax bracket, and index future gains against inflation. Once that is done, soaring tax receipts from soaring stock and bond markets will once again surprise the liberal editorialists, as has happened with every cut in marginal tax rates.