CUTTING KUTTNER TO THE QUICK ON CAPITAL GAINS
I believe small-business owners would disagree with Robert Kuttner's premise that a capital-gains tax cut would be a gift to the rich, not the middle class ("Capital gains: Here's one the Democrats can win," Economic Viewpoint, Dec. 19).
The rich, whenever possible, avoid such taxes by taking their losses and letting their gains run. The small entrepreneur, however, usually has his equity tied up in one undertaking. If he sells out, he is immediately up to 28% poorer both in earning power and net worth because of capital-gains tax.
This restriction on the mobility of capital limits small-business owners' ability to build net worth and move up to other opportunities. These members of the middle class--the backbone of our free-enterprise system--labor mightily over the years, plowing after-income-tax dollars back into their businesses in order to grow. Isn't one tax on capital formation enough? The U.S. is one of the few countries in the world to tax capital growth twice.
Norfolk Daily News
Kuttner says: "With such a generous tax cut, no conceivable increase in stock sales would make up the revenue loss." But according to figures from the Congressional Budget Office, tax cuts in the early 1980s produced gains in revenue (chart). This shows Kuttner's statement is based on his own version of the facts and not on history.
Gregory J. Emmerth
Kuttner's article is interesting, but like many treatises, it misses the essence of who pays capital-gains tax.
The piece assumes that such taxes are paid by the wealthy. In reality, however, most capital gains are earned on financial instruments owned by the middle class: mutual funds, retirement annuities, and other vehicles.
In the 1992 race, George Bush failed to respond to the Democrats' claim that capital-gains cuts would benefit the rich. He should have known better. The real issue is "Capital gains: Here's one the Republicans shouldn't lose."
Michael A. Mogavero
School of Business
Whatever objections there might otherwise be, a tax cut makes good sense if applied only to long-term investors. As a recent Twentieth Century Fund report suggested, a capital-gains tax that is steeply graduated--falling dramatically as the holding period lengthens--would discourage the short-term outlook that's the bane of financial markets. This long-discussed proposal would also mitigate the revenue loss otherwise entailed.
Professor of Finance & Law
Columbia University School of Law