[Congressional Record Volume 142, Number 3 (Friday, January 5, 1996)]
[Extensions of Remarks]
[Pages E31-E32]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




      TAX FAIRNESS, ECONOMIC GROWTH AND FISCAL RESPONSIBILITY ACT

                                 ______


                           HON. DAVID DREIER

                             of california

                    in the house of representatives

                        Friday, January 5, 1996

  Mr. DREIER. Mr. Speaker, President Clinton can be rightly criticized 
for failing to keep his promise to negotiate a 7-year balanced budget 
using honest numbers. However, I applaud his willingness to support a 
capital gains tax cut because it will be critical to the success of any 
future agreement.
  The President's support for capital gains tax reduction is an 
acknowledgment of what every economist who studies the issue already 
knows: capital gains tax reduction is a win-win-win proposition. It 
will spur hundreds of billions of dollars of additional capital 
formation, create jobs, and promote economic expansion. It will bring 
immediate relief to small investors, small businesses, workers, 
retirees, and economically distressed communities. In addition, it will 
increase tax revenues to government treasuries. And the lower the rate, 
the greater the benefits.
  In deciding how to reduce the capital gains tax rate at the Federal 
level, I share the view of Federal Reserve Board Chairman Alan 
Greenspan, who said: ``It is easier to make the case to eliminate it 
entirely than it is to merely reduce the rate.''
  That is why Representative Tauzin and I, on behalf of the Zero 
Capital Gains Tax Caucus, are today introducing H.R. 2861, the Tax 
Fairness, Economic Growth and Fiscal Responsibility Act. Effective 
January 1, 1996, it establishes a zero tax rate on any long-term 
capital gain recognized on the sale or exchange of any property.
  There are three major reasons why zero is the appropriate capital 
gains tax rate. First, it will eliminate the bias in the capital gains 
tax against lower- and middle-income taxpayers. The American dream is 
to work hard, buy a home, maybe build a small business, save for 
retirement, and eventually pass along something to children or 
grandchildren. In short, Americans strive to build a better future. 
Despite the political charge that the capital gains tax is a tax on the 
rich, it is actually a tax on those who seek the American dream.
  In looking at data on tax returns from 1991, William Beach, a tax 
analyst at the Heritage Foundation found that half of all capital gains 
were earned by households with incomes from other sources under 
$100,000. Of those, 27 percent of taxpayer households with capital 
gains contained taxpayers over the age of 65 or blind. These taxpayers, 
according to Beach, had an average income of $43,637. In explaining why 
lower and middle-income taxpayers will benefit most from capital gain 
tax reduction, Beach stated:

       When critics claim that capital gains go mainly to the 
     wealthy, they mislead the public by including the gain when 
     citing a person's income. In this way, a retiree living on a 
     $12,000 Social Security check who realizes a $30,000 capital 
     gain one year on the sale of his house is classified as a 
     ``person with a $42,000 income who receives a capital gain.'' 
     By this logic, of course, the only people who win $1 million 
     lotteries are millionaires.

  The bottom line is that small business owners, middle-income 
families, and small investors are the least able to keep capital tied 
up and, therefore, pay the bulk of the capital gains tax revenue.
  The second major benefit of a zero capital gains tax is increased 
economic growth leading to new job creation and increased living 
standards. Had such a tax rate been implemented in 1994, it would by 
the year 2000 result in an additional GDP growth of $1.5 trillion, 1.1 
million new private sector jobs, and an $1,884 increase in average 
annual wages for all workers. As Alan Reynolds of the Hudson Institute 
noted in testimony before the Senate Finance Committee last February:

       Once we abandon the quaint habit of defining capital gains 
     as no different from a weekly paycheck, economics offers no 
     other clear justification for taxing capital gains at all. No 
     economist has ever dared to suggest that a capital gains tax 
     does no damage to the economy.

  Completely eliminating the tax on capital gains might sound far-
fetched, but its not a new an idea. Back in 1978, when stagflation 
forced creative thinking, Digital Resources Inc. [DRI] did a static 
Keynesian econometric analysis of a zero capital gains tax. DRI 
predicted that eliminating capital gains taxes would boost GNP by $200 
billion, increase capital formation by $81 billion, and create 3 
million new jobs. Just as important from a 1990's perspective, DRI 
predicted that a zero capital gains tax would increase net Government 
tax revenue by $38 billion over 5 years.
  Fortunately, we do not have to rely on economic forecasting models 
alone to observe the economic benefits of capital gains tax reduction. 
Our Federal system has permitted States to become ``laboratories of 
democracy'' in which creative and sometimes controversial public policy 
proposals can be implemented on a smaller and more manageable scale. 
Over the past few years, a number of these laboratories have tested the 
effects of capital gains tax rate reductions on statewide economic 
growth and revenue. The results of these experiments have been greater 
economic activity, stronger employment, and the generation of increased 
State tax revenues.

  Three States in particular that have recently experimented with 
capital gains tax rate reduction--Mississippi, South Carolina, and 
Wisconsin--have, in each case, seen an increase in economic growth, job 
creation, and State tax 

[[Page E32]]
revenues. In May 1994, a fourth State, Colorado, reduced its capital 
gains tax rate to promote increased investment and economic activity. 
Befitting their role of ``laboratories of democracy,'' each State has 
reduced the cost of capital in different ways.
  Mississippi and Colorado completely eliminated State taxes on capital 
gains. It is reported that every $1 million in new investment in 
Mississippi creates $2.2 million in economic growth and 120 new jobs. 
In 1989, South Carolina cut its capital gains tax rate from 7 percent 
to 4 percent. Since that time, the State has enjoyed stronger than 
average economic growth and job creation. Wisconsin has encouraged 
investment in that State by implementing a 60 percent exclusion of the 
value of any capital gain from taxation.
  The third major benefit of a zero capital gains tax rate is the 
promotion of fiscal responsibility. While the static forecasting model 
predicted a cumulative $490 billion revenue loss between 1994 and 2000 
as a result of a zero capital gains tax rate, that estimate does not 
take into consideration additional income, payroll, and excise tax 
revenues from $1.65 trillion in added economic growth over the period. 
As a result of greater economic activity, a zero capital gains tax 
rate, had it been enacted effective in 1994, would actually produce a 
net increase of $25 billion in revenue to the Federal and State 
governments through the year 2000.
  Mr. Speaker, one would think that the combined benefits of tax 
fairness, economic growth, and increased Government revenues would be 
too much for Congress and the President to resist. Yet today, we 
continue to perpetuate an enormously damaging tax myth that virtually 
every other country with a significant economy has abandoned. 
Therefore, I urge my colleagues to join me in ending this antifairness, 
antigrowth, anti-American dream policy by cosponsoring H.R. 2861.

                          ____________________