Bush’s Capital Gains Tax Cut Plan Detailed

President Bush, preparing to present his budget to Congress today, will propose restoring a tax break for capital gains but limiting it to stocks and similar investments held for at least three years, Administration officials said Wednesday.

For the fiscal year that begins Oct. 1, Bush will project a deficit of about $98 billion, sources said, slightly higher than the $92.5-billion deficit that former President Ronald Reagan had projected.

Head Start Funds

Behind the higher deficit is Bush’s plan to spend more for education, child care, environmental protection and the homeless. His budget reportedly includes more money for the Head Start program for disadvantaged preschoolers and tax credits to offset some of the costs of adoption and of child care for the working poor.

The proposed capital-gains tax cut, which would be phased in over several years, is designed to deliver on one of Bush’s strongest campaign promises. It is aimed at encouraging investors to favor long-term investments over quicker deals.

But the tax cut is likely to encounter stiff opposition from many Democrats in Congress, who argue that the revival of a lower capital-gains tax rate would be a boon to the wealthy and widen the budget deficit.

Bush will respond that his proposal, far from losing tax revenues for the government, would actually raise about $5 billion next year by encouraging additional profit-taking. And in subsequent years, aides said, it would produce extra revenues by contributing to economic growth.

Moreover, Bush is expected to run into roadblocks from lawmakers reluctant to make significant changes in the tax code so soon after agreeing to the sweeping 1986 tax revision, in which the capital-gains tax break was ended as part of a package that dramatically lowered overall tax rates.

Called ‘Unacceptable’

“At a time when virtually every segment of our country is being asked to sustain a sacrifice of one form or another,” said Senate Budget Committee Chairman Jim Sasser (D-Tenn.), “it is simply unacceptable to be considering tax breaks for the very wealthiest segment of the American population.”

Under current law, all capital gains are taxed at ordinary income-tax rates, 15% for the majority of taxpayers and 28% or 33% for more affluent individuals.

Bush’s plan calls for a 15% tax rate on long-term capital gains for those in the 28% and 33% tax brackets and a 9% rate for those who pay 15% on their other income.

To prevent tax-shelter operators from taking advantage of the lower rate, the Administration would exclude real estate and other assets subject to depreciation. The plan would also exclude investments in collectibles and similar items from the tax break.

Bush’s plan, if adopted, would be phased in so that investors would not be discouraged in the early years from taking their profits.

Timetable Not Clear

Although the exact timetable was not clear, investors initially would be eligible for the lower capital-gains rate on investments that they had held for just one year. The required holding period would be lengthened in subsequent years.

As part of its effort to win approval of the plan, the Bush Administration is expected to argue that lowering the capital-gains tax rate and lengthening the holding period would discourage politically unpopular corporate takeovers. The reason is that the tax change would encourage investors to hold their stocks rather than sell them to corporate raiders.

Bush’s budget for fiscal 1990 will include spending of roughly $1.16 trillion, sources said. The $98-billion deficit, though greater than that proposed by Reagan on Jan. 9, would still fall under the $100-billion ceiling mandated by the Gramm-Rudman deficit-reduction law.

Bush’s spending blueprint would add more than $250 million in education spending to Reagan’s earlier request, sources said, with most of the money going to the Head Start program.

New tax breaks intended to encourage support of families and to fulfill his promises to conservative elements of the Republican Party would be added. These include an additional $1,000 child-care credit for low-income families with children under the age of 5.

Also expected is a tax deduction of up to $3,000 to help cover the cost of adoptions, with an emphasis on families that adopt children with special needs.

Budget officials also said that Bush will propose to spend more than Reagan had planned to clean up nuclear weapons plants. One Administration source agreed with a report in the New York Times that Bush will ask for $360 million more than the $1.4 billion Reagan had requested in his final budget for all of the Energy Department’s waste-management programs.

But other aides, questioning the figures, said that the Energy Department sought only $315 million next year in actual spending on weapons plant cleanup. Arguing that the department is in no position to double the program so quickly, they suggested that Bush may intend simply to increase the $315-million spending plan for fiscal year 1990 to $360 million.