Of Capital Gains and Preaching to the Converted


Cutting the tax on capital gains is a lot like religion--either you have the faith or you don’t.

President Bush said in his State of the Union address that he was giving Federal Reserve Board Chairman Alan Greenspan the job of once again reviewing the oft-studied issue to avoid “unproductive partisan bickering.”

Greenspan’s study seems certain to reinforce the convictions of the true believers, who insist that a capital gains tax reduction would create jobs and spur productivity by providing an incentive for people to invest more money in assets subject to the tax.

But it is less likely to convert the heathen, who argue that cutting the tax on profits from sales of stocks, bonds, real estate and other assets will just make rich people even richer without significantly increasing the net level of investments.


“The President doesn’t want to fight over capital gains this year, and this appears to be a deft way out,” a spokesman for Rep. Dan Rostenkowski (D-Ill.), chairman of the House Ways and Means Committee, said Wednesday. “This effectively takes the issue off the table.”

But a spokesman for one of the most prominent conservatives in Congress, House Republican Whip Newt Gingrich of Georgia, said tax cut advocates were “very pleased” by the President’s proposal. “We think this is an excellent way to frame the issue,” he said.

The Bush Administration tried last year to cut the top tax rate on gains from assets held for three years to 19.6% from the current level of 28%. The proposal made no headway in Congress, where Democrats argued that a capital gains tax cut would raise the deficit. They countered it with a plan to impose a special surtax on millionaires.

The debate ultimately bogged down in a dispute over bedrock political positions: the Republican focus on economic growth and the Democratic insistence on equity. Each side produced reams of statistics aimed at demonstrating the truth of its theology without managing to persuade the opposition.


Greenspan, who will lead a new investigation, already is a true believer.

“I’ve always . . . been supportive of either lowering the capital gains tax, or preferably, eliminating it completely,” the Fed chairman told the Senate Banking Committee last week. “There’s no question in my mind that the capital gains tax cut would be helpful with respect to the issue of property values and economic growth.”

A Federal Reserve spokesman said Wednesday that it was too early to say who would serve on the commission or how long the study will take.

It appears, however, that the panel’s real mission is to keep conservatives pleased with the White House while avoiding a pitched battle in the halls of Congress this session.


The Greenspan study, drawing on expert economic opinion, undoubtedly will conclude that a capital gains tax cut “will create a lot of jobs,” said Tony Blankley, a spokesman for Gingrich. “The terms of the political debate will be different from the polemics of last year,” he said.

Rostenkowski’s spokesman had a different perspective: “Whenever you don’t want to touch a politically delicate subject, you do a study.”

Treasury Secretary Nicholas F. Brady has readily acknowledged that he does not want to revisit last year’s battle again.

At a recent Senate Finance Committee hearing, Sen. Connie Mack (R-Fla.), an ardent advocate of lower taxes, said a capital gains cut would boost the value of real estate and help the government dispose of its massive inventory of properties from failed savings and loans.


Brady told Mack: “If you could push that proposal through Congress, I would be the first in line. What you can’t assure me of is that in putting that kind of proposition through Congress, that you don’t raise other taxes. And I think that that particular argument is one that we had last year. It’s over with and done with. We spent a lot of time on it.”

Democratic leaders of Congress have made it unmistakably clear that they will not accept the White House’s fundamental faith in a capital gains tax cut, no matter how many expert economists join the choir.

Senate Majority Leader George Mitchell (D-Maine) said in his response to the State of the Union speech: “We’ve got to bring the deficits down and the jobs home. The President’s way to do that is to give huge tax cuts to those with incomes over $200,000 a year. We disagree.”

House Speaker Thomas Foley (D-Wash.) expressed similar sentiments. “I think personally that it would be extremely difficult to proceed with a capital gains reduction at a time when the costs of the war are still uncertain and the deficit is at record levels,” he said.