A Capital Gains Cut Looks Like A Capitol Winner

Is all the talk Washington pols are spouting about a new era of bipartisanship for real? The answer may lie in the debate over capital gains. For decades, Republicans and Democrats have fought with fervor over how much of a tax break investors should get for their gains on capital assets. This year, though, President Clinton and his GOP foes in Congress just might cut a deal.

Lawmakers of both parties are filling the legislative hopper with capital-gains bills. To head off a broad-based cut, Democrats are proposingtargeted tax relief. Senate Minority Leader Thomas A. Daschle (D-S.D.), for example, would defer gains for retiring farmers and small-business investors. Other popular beneficiaries are small companies, especially in high tech. Representative Robert T. Matsui (D-Calif.) proposes letting investors exclude 75% of their gains on stock in companies worth under $100 million. For their part, Republicans insist they'll still make sweeping cuts for all investors a keystone of their five-year, $163 billion tax cut.

ON THE BENCH. Faced with that choice, Congress may adopt both approaches. The model: a bill introduced on Jan. 21 by Senators Orrin G. Hatch (R-Utah) and Joseph I. Lieberman (D-Conn.) that would shield half of all capital gains from taxes, effectively cutting the top rate on profits from 28% to 19.8%. The bill also incorporates Matsui's break for small-company investors, whose top rate would fall to 9.9%.

That leaves Clinton as the only player not in the capital-gains game. The White House expects to propose a $100 billion tax-cut package in its budget, due on Feb. 6. But that plan contains only one capital-gains break--hiking the amount of home-sale profits excluded from taxes to $500,000 from the current $125,000. Clintonites pitch that proposal as tax simplification--relieving taxpayers of keeping records needed to calculate their home-sales gains, which are seldom large enough to trigger any taxes--not as a break for


Across-the-board capital gains cuts "aren't a priority for the President" because "they don't do much for the economy," says Deputy Treasury Secretary Lawrence H. Summers. And Clintonites note that Treasury Secretary Robert E. Rubin helped scuttle the GOP's 1995 attempt to cut the gains tax.

GOP lawmakers suspect Clinton is just maneuvering for position in the upcoming budget fight. "The White House and the Treasury Secretary know that to pass a tax bill through Congress, we're going to have to have broad-based capital-gains relief," says House Ways & Means Chairman Bill Archer (R-Tex.). Many Democrats agree: "The odds [of a cut] are better than at any time in recent years," says Lieberman.

NO HELP? While the political stars may be in alignment, the economic case for a cut isn't nearly so clear. The capital-gains jihad has produced little clear evidence that modest reductions in the tax rate on gains will boost investment or the economy by much. And with the stock market soaring, partisans are hard-pressed to argue that companies need a tax break to attract capital. "Mutual-fund investors pay capital-gains taxes every year, but that's obviously not keeping people away from funds," argues Robert S. McIntyre, director of Citizens for Tax Justice, which opposes capital-gains breaks.

Still, capital-gains taxes have always been more about politics than economics. Clinton has made balancing the budget a test of government's effectiveness--and working with the GOP is the key to that deal. A cut in investors' taxes would be a small price for the President to pay if it keeps his dreams of bipartisanship alive.

Before it's here, it's on the Bloomberg Terminal.