US Capital Gains Tax Cut More Likely

by Mike Godfrey, Tax-News.com, Washington

10 September 2001

Frantic discussions in Washington about how to stem the tide of economic misfortune threatening to sweep the US into recession are centering around a reduction in capital gains tax, which Republicans say would re-ignite interest in flagging stock markets. Perhaps not very consistently, Republican heavyweights who have been urging the President towards a reduction in capital gains tax from 20% to 15% for two years point out that it would generate a surge in tax revenues as investors sold holdings to take advantage of the lower rate.

Senate Minority Leader Trent Lott is more coherent in saying that a capital gains cut would encourage growth in the business sector, and it is thought in Washington that the administration is edging toward supporting a capital gains cut as a way to stimulate the economy. The White House is not yet convinced, though. "We need to let the president's tax cut, as well as the Federal Reserve's interest rate cuts, take full effect," said Jennifer Millerwise, a White House spokeswoman. Treasury Secretary Paul O'Neill as well is in no doubt that the tax cut will win through, coinciding later this year with a cyclical rebound that will see the economy recovering into 2002.

Democrat Tom Daschle of South Dakota, Senate majority leader, said on ABC's "This Week" on Sunday that cutting capital gains tax on the sale of investments such as stocks, bonds and real estate would be unlikely to boost the economy and would worsen the existing budget problems caused by the Republicans' $1,350bn tax cut. "To propose another tax cut like that, I think, would cause real concern, and frankly, I'm not sure would get us out of the box," said Mr Daschle.

He also questioned the wisdom of triggering additional sell-offs in the stock market at a time when share prices and investor confidence are already volatile. "The market is plummeting. If we see additional sell-offs, I'm not sure that does anybody any good." And of course he blames the President for the whole mess, saying: "It's his budget, it's his economy, it's his tax cut, it's his solution."

A number of other Democrats however are saying that they might support further economic stimulus, especially as part of a deal to scale back the longer-term components of Mr. Bush's tax cut. One idea mentioned by several Democrats was an immediate tax cut that would extend even to people who do not make enough money to pay federal income taxes.

Another possibility that could win Democrat support would be to temporarily reduce the payroll tax that finances Social Security. This would reduce the current surplus in the retirement trust fund, but would not divert the trust fund into government spending, or concentrate another round of tax cuts on the wealthy.

"We'd want to do something to put money in people's pockets quickly," Senator Kent Conrad, the North Dakota Democrat who is chairman of the Senate Budget Committee, said on "Fox News Sunday."

For George Bush though, it's no longer the economy that is the main driving force behind his tactics in Congress, where he faces a long-drawn out fight to hold back inflated spending programmes: 'It's the election, stupid!' The President has to try to limit the damage to his own and his party's image as guardians of the economy before next year's congressional elections. But every time he vetoes a spending bill full of Democrat tid-bits for one needy section of the electorate or another, he switches off more desperately-needed votes. It's only expansion of the economy and hence of the tax base that can dig him out of this hole - hence the attractions of a capital gains tax cut.

Unfortunately for Mr Bush, the first set-piece budget battle has him cast on the wrong side: Donald Rumsfeld, US defence secretary, said over the weekend that he would advise the President to veto a military spending bill that cuts money for missile defence after the Democrat-controlled Senate armed services committee voted last week to cut Dollars 1.3bn from the administration's funding request.

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