[Congressional Record Volume 143, Number 10 (Thursday, January 30, 1997)]
[Senate]
[Pages S890-S893]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GREGG:
  S. 252. A bill to amend the Internal Revenue Code of 1986 to provide 
a reduction in the capital gains tax for assets held more than 2 years, 
to impose a surcharge on short-term capital gains, and for other 
purposes; to the Committee on Finance.


                       CAPITAL GAINS LEGISLATION

  Mr. GREGG. Mr. President, I introduce a bill that will have a 
significant impact on the promotion of long-term investment through a 
reduction in the capital gains tax. I believe the Congress has a 
responsibility to enact laws promoting long-term capital investment and 
savings by all Americans. Part of fulfilling this obligation must 
include implementing a plan that would reduce the current capital gains 
tax rate on long-term investments.
  We must also, however, balance this important economic goal against 
the moral issue of adding increasing debt onto our children's 
shoulders. This becomes an unavoidable issue in the capital gains 
debate because the Joint Committee on Taxation scores capital gains a 
big revenue loser. This scoring issue is an unfortunate fact that we in 
Congress cannot ignore.

[[Page S891]]

  Accordingly, I have developed legislation that would encourage long-
term investment by amending the current capital gains tax using a 
sliding scale plan. My bill encourages an individual to hold an asset 
over a number of years, thus, allowing a greater tax reduction on 
investments, with the maximum benefit being reached after 4 years. It 
would reward individuals who look toward contributing to a savings plan 
over a number of years, while at the same time making quick-fix 
investments less attractive. This sliding scale plan would encourage 
investments that benefit long-term savings, such as a child's 
education, an individual's retirement, or other non-speculative 
holdings.
  The theory behind the sliding scale reduction on capital gains hinges 
upon an agreed goal: the promotion of savings and long-term investment 
through a capital gains cut, while recognizing our current fiscal 
realities. The Joint Committee on Taxation estimates this plan would 
lose just $7.4 billion in revenue over the 1995-2000 period.
  Finally, Mr. President, I ask unanimous consent that a Washington 
Post op-ed by Louis Lowenstein, professor of finance at Columbia 
University, be included in the Record. Professor Lowenstein's piece 
outlines the current fiscal problem this legislation attempts to 
address.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                 S. 252

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

       (a) Short Title.--This Act may be cited as the ``Long-Term 
     Investment Incentive Act of 1997''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.

     SEC. 2. REDUCTION OF TAX ON LONG-TERM CAPITAL GAINS ON ASSETS 
                   HELD MORE THAN 2 YEARS.

       (a) In General.--Part I of subchapter P of chapter 1 
     (relating to treatment of capital gains) is amended by 
     redesignating section 1202 as section 1203 and by inserting 
     after section 1201 the following new section:

     ``SEC. 1202. CAPITAL GAINS DEDUCTION FOR ASSETS HELD BY 
                   NONCORPORATE TAXPAYERS MORE THAN 2 YEARS.

       ``(a) General Rule.--If a taxpayer other than a corporation 
     has a net capital gain for any taxable year, there shall be 
     allowed as a deduction an amount equal to the sum of--
       ``(1) 20 percent of the qualified 4-year capital gain,
       ``(2) 10 percent of the qualified 3-year capital gain, plus
       ``(3) 5 percent of the qualified 2-year capital gain.
       ``(b) Definitions.--For purposes of this title--
       ``(1) Qualified 4-year capital gain.--The term `qualified 
     4-year capital gain' means the lesser of--
       ``(A) the amount of long-term capital gain which would be 
     computed for the taxable year if only gain from the sale or 
     exchange of property held by the taxpayer for more than 4 
     years were taken into account, or
       ``(B) the net capital gain.
       ``(2) Qualified 3-year capital gain.--The term `qualified 
     3-year capital gain' means the lesser of--
       ``(A) the amount of long-term capital gain which would be 
     computed for the taxable year if only gain from the sale or 
     exchange of property held by the taxpayer for more than 3 
     years but not more than 4 years were taken into account, or
       ``(B) the net capital gain, reduced by the qualified 4-year 
     capital gain.
       ``(3) Qualified 2-year capital gain.--The term `qualified 
     2-year capital gain' means the lesser of--
       ``(A) the amount of long-term capital gain which would be 
     computed for the taxable year if only gain from the sale or 
     exchange of property held by the taxpayer for more than 2 
     years but not more than 3 years were taken into account, or
       ``(B) the net capital gain, reduced by the qualified 4-year 
     capital gain and qualified 3-year capital gain.
       ``(c) Estates and Trusts.--In the case of an estate or 
     trust, the deduction under subsection (a) shall be computed 
     by excluding the portion (if any) of the gains for the 
     taxable year from sales or exchanges of capital assets which, 
     under sections 652 and 662 (relating to inclusions of amounts 
     in gross income of beneficiaries of trusts), is includible by 
     the income beneficiaries as gain derived from the sale or 
     exchange of capital assets.
       ``(d) Coordination With Treatment of Capital Gain Under 
     Limitation on Investment Interest.--For purposes of this 
     section, the net capital gain for any taxable year shall be 
     reduced (but not below zero) by the amount which the taxpayer 
     takes into account as investment income under section 
     163(d)(4)(B)(iii).
       ``(e) Treatment of Collectibles.--
       ``(1) In general.--Solely for purposes of this section, any 
     gain or loss from the sale or exchange of a collectible shall 
     be treated as a short-term capital gain or loss (as the case 
     may be), without regard to the period such asset was held. 
     The preceding sentence shall apply only to the extent the 
     gain or loss is taken into account in computing taxable 
     income.
       ``(2) Treatment of certain sales of interest in 
     partnership, etc.--For purposes of paragraph (1), any gain 
     from the sale or exchange of an interest in a partnership, S 
     corporation, or trust which is attributable to unrealized 
     appreciation in the value of collectibles held by such entity 
     shall be treated as gain from the sale or exchange of a 
     collectible. Rules similar to the rules of section 751(f) 
     shall apply for purposes of the preceding sentence.
       ``(3) Collectible.--For purposes of this subsection, the 
     term `collectible' means any capital asset which is a 
     collectible (as defined in section 408(m) without regard to 
     paragraph (3) thereof).
       ``(f) Transitional Rule.--
       ``(1) In general.--Gain may be taken into account under 
     subsection (b)(1)(A), (b)(2)(A), or (b)(3)(A) only if such 
     gain is properly taken into account on or after February 1, 
     1997.
       ``(2) Special rules for pass-thru entities.--
       ``(A) In general.--In applying paragraph (1) with respect 
     to any pass-thru entity, the determination of when gains and 
     losses are properly taken into account shall be made at the 
     entity level.
       ``(B) Pass-thru entity defined.--For purposes of 
     subparagraph (A), the term `pass-thru entity' means--
       ``(i) a regulated investment company,
       ``(ii) a real estate investment trust,
       ``(iii) an S corporation,
       ``(iv) a partnership,
       ``(v) an estate or trust, and
       ``(vi) a common trust fund.''
       (b) Deduction Allowable in Computing Adjusted Gross 
     Income.--Subsection (a) of section 62 is amended by inserting 
     after paragraph (16) the following new paragraph:
       ``(17) Long-term capital gains.--The deduction allowed by 
     section 1202.''
       (c) Maximum Capital Gains Rate.--Clause (i) of section 
     1(h)(1)(A), as amended by section 3(a), is amended by 
     striking ``the net capital gain'' and inserting ``the excess 
     of the net capital gain over the deduction allowed under 
     section 1202''.
       (d) Treatment of Certain Pass-Thru Entities.--
       (1) Capital gain dividends of regulated investment 
     companies.--
       (A) Subparagraph (B) of section 852(b)(3) is amended to 
     read as follows:
       ``(B) Treatment of capital gain dividends by 
     shareholders.--A capital gain dividend shall be treated by 
     the shareholders as gain from the sale or exchange of a 
     capital asset held for more than 1 year but not more than 2 
     years; except that--
       ``(i) the portion of any such dividend designated by the 
     company as allocable to qualified 4-year capital gain of the 
     company shall be treated as gain from the sale or exchange of 
     a capital asset held for more than 4 years,
       ``(ii) the portion of any such dividend designated by the 
     company as allocable to qualified 3-year capital gain of the 
     company shall be treated as gain from the sale or exchange of 
     a capital asset held for more than 3 years but not more than 
     4 years, and
       ``(iii) the portion of any such dividend designated by the 
     company as allocable to qualified 2-year capital gain of the 
     company shall be treated as gain from the sale or exchange of 
     a capital asset held for more than 2 years but not more than 
     3 years.

     Rules similar to the rules of subparagraph (C) shall apply to 
     any designation under clause (i), (ii), or (iii).''
       (B) Clause (i) of section 852(b)(3)(D) is amended by adding 
     at the end the following new sentence: ``Rules similar to the 
     rules of subparagraph (B) shall apply in determining 
     character of the amount to be so included by any such 
     shareholder.''
       (2) Capital gain dividends of real estate investment 
     trusts.--Subparagraph (B) of section 857(b)(3) is amended to 
     read as follows:
       ``(B) Treatment of capital gain dividends by 
     shareholders.--A capital gain dividend shall be treated by 
     the shareholders or holders of beneficial interests as gain 
     from the sale or exchange of a capital asset held for more 
     than 1 year but not more than 2 years; except that--
       ``(i) the portion of any such dividend designated by the 
     real estate investment trust as allocable to qualified 4-year 
     capital gain of the trust shall be treated as gain from the 
     sale or exchange of a capital asset held for more than 4 
     years,
       ``(ii) the portion of any such dividend designated by the 
     trust as allocable to qualified 3-year capital gain of the 
     trust shall be treated as gain from the sale or exchange of a 
     capital asset held for more than 3 years but not more than 4 
     years, and
       ``(iii) the portion of any such dividend designated by the 
     trust as allocable to qualified

[[Page S892]]

     2-year capital gain of the trust shall be treated as gain 
     from the sale or exchange of a capital asset held for more 
     than 2 years but not more than 3 years.

     Rules similar to the rules of subparagraph (C) shall apply to 
     any designation under clause (i) or (ii).''
       (3) Common trust funds.--Subsection (c) of section 584 is 
     amended--
       (A) by inserting ``and not more than 2 years'' after ``1 
     year'' each place it appears in paragraph (2),
       (B) by striking ``and'' at the end of paragraph (2), and
       (C) by redesignating paragraph (3) as paragraph (6) and 
     inserting after paragraph (2) the following new paragraphs:
       ``(3) as part of its gains from sales or exchanges of 
     capital assets held for more than 2 years but less than 3 
     years, its proportionate share of the gains of the common 
     trust fund from sales or exchanges of capital assets held for 
     more than 2 years but not more than 3 years,
       ``(4) as part of its gains from sales or exchanges of 
     capital assets held for more than 3 years but less than 4 
     years, its proportionate share of the gains of the common 
     trust fund from sales or exchanges of capital assets held for 
     more than 3 years but less than 4 years,
       ``(5) as part of its gains from sales or exchanges of 
     capital assets held more than 4 years, its proportionate 
     share of the gains of the common trust fund from sales or 
     exchanges of capital assets held for more than 4 years, 
     and''.
       (e) Technical and Conforming Changes.--
       (1) Subparagraph (B) of section 170(e)(1) is amended by 
     inserting ``(or, in the case of a taxpayer other than a 
     corporation, the percentage of such gain equal to 100 percent 
     minus the percentage applicable to such gain under section 
     1202(a))'' after ``the amount of gain''.
       (2) Subparagraph (B) of section 172(d)(2) is amended to 
     read as follows:
       ``(B) the deduction under section 1202 and the exclusion 
     under section 1203 shall not be allowed.''
       (3)(A) Section 221 (relating to cross reference) is amended 
     to read as follows:

     ``SEC. 221. CROSS REFERENCES.

       ``(1) For deduction for net capital gains in the case of a 
     taxpayer other than a corporation, see section 1202.
       ``(2) For deductions in respect of a decedent, see section 
     691.''
       (B) The table of sections for part VII of subchapter B of 
     chapter 1 is amended by striking ``reference'' in the item 
     relating to section 221 and inserting ``references''.
       (4) The last sentence of section 453A(c)(3) is amended by 
     striking all that follows ``long-term capital gain,'' and 
     inserting ``the maximum rate on net capital gain under 
     section 1(h) or 1201 or the deduction under section 1202 
     (whichever is appropriate) shall be taken into account.''
       (5) Paragraph (4) of section 642(c) is amended to read as 
     follows:
       ``(4) Adjustments.--To the extent that the amount otherwise 
     allowable as a deduction under this subsection consists of 
     gain from the sale or exchange of capital assets held for 
     more than 1 year, proper adjustment shall be made for any 
     deduction allowable to the estate or trust under section 1202 
     or any exclusion allowable to the estate or trust under 
     section 1203(a). In the case of a trust, the deduction 
     allowed by this subsection shall be subject to section 681 
     (relating to unrelated business income).''
       (6) The last sentence of paragraph (3) of section 643(a) is 
     amended to read as follows: ``The deduction under section 
     1202 and the exclusion under section 1203 shall not be taken 
     into account.''
       (7) Subparagraph (C) of section 643(a)(6) is amended by 
     inserting ``(i)'' before ``there shall'' and by inserting 
     before the period ``, and (ii) the deduction under section 
     1202 (relating to capital gains deduction) shall not be taken 
     into account''.
       (8) Paragraph (4) of section 691(c) is amended by striking 
     ``sections 1(h), 1201, and 1211'' and inserting ``sections 
     1(h), 1201, 1202, and 1211''.
       (9) The second sentence of section 871(a)(2) is amended by 
     inserting ``or 1203'' after ``1202''.
       (10) Subsection (d) of section 1044 is amended by striking 
     ``1202'' and inserting ``1203''.
       (11) Paragraph (1) of section 1402(i) is amended by 
     inserting ``, and the deduction provided by section 1202 
     shall not apply'' before the period at the end thereof.
       (f) Clerical Amendment.--The table of sections for part I 
     of subchapter P of chapter 1 is amended by inserting after 
     the item relating to section 1201 the following new item:

``Sec. 1202. Capital gains deduction for assets held by noncorporate 
              taxpayers more than 2 years.''

       (g) Effective Date.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to taxable years ending after January 31, 1997.
       (2) Contributions.--The amendment made by subsection (e)(1) 
     shall apply to contributions on or after February 1, 1997.

     SEC. 3. SURCHARGE ON CAPITAL GAINS ON ASSETS HELD 1 YEAR OR 
                   LESS.

       (a) In General.--Subsection (h) of section 1 (relating to 
     maximum capital gains rate) is amended to read as follows:
       ``(h) Maximum Capital Gains Taxes.--
       ``(1) In general.--If a taxpayer has a net capital gain for 
     any taxable year, then the tax imposed by this section shall 
     not exceed the sum of--
       ``(A) a tax computed at the rates and in the same manner as 
     if this subsection had not been enacted on the greater of--
       ``(i) taxable income reduced by the amount of net capital 
     gain, or
       ``(ii) the amount of taxable income taxed at a rate below 
     28 percent, plus
       ``(B) a tax of 28 percent of the amount of taxable income 
     in excess of the amount determined under subparagraph (A).

     For purposes of the preceding sentence, the net capital gain 
     for any taxable year shall be reduced (but not below zero) by 
     the amount which the taxpayer elects to take into account as 
     investment income for the taxable year under section 
     163(d)(4)(B)(iii).
       ``(2) Surcharge on net short-term capital gain.--
       ``(A) In general.--If a taxpayer has a net short-term 
     capital gain for any taxable year, the tax imposed by this 
     section (without regard to this paragraph) shall be increased 
     by an amount equal to the sum of--
       ``(i) 5.6 percent of the taxpayer's 6-month short-term 
     capital gain, plus
       ``(ii) 2.8 percent of the taxpayer's 12-month short-term 
     capital gain.
       ``(B) Maximum rate.--
       ``(i) In general.--Subparagraph (A) shall not be applied to 
     the extent it would result in--

       ``(I) 6-month short-term capital gain being taxed at a rate 
     greater than 33.6 percent, or
       ``(II) 12-month short-term capital gain being taxed at a 
     rate greater than 30.8 percent.

       ``(ii) Ordering rule.--For purposes of clause (i), the rate 
     or rates at which 6-month or 12-month short-term capital gain 
     is being taxed shall be determined as if--

       ``(I) such gain were taxed after all other taxable income, 
     and
       ``(II) 12-month short-term capital gain were taxed after 6-
     month short-term capital gain.

       ``(C) Definitions.--For purposes of this paragraph--
       ``(i) 6-month short-term capital gain.--The term `6-month 
     short-term capital gain' means the lesser of--

       ``(I) the amount of short-term capital gain which would be 
     computed for the taxable year if only gain from the sale or 
     exchange of property held by the taxpayer for 6 months or 
     less were taken into account, or
       ``(II) net short-term capital gain.

       ``(ii) 12-month short-term capital gain.--The term `12-
     month short-term capital gain' means the lesser of--

       ``(I) the amount of short-term capital gain which would be 
     computed for the taxable year if only gain from the sale or 
     exchange of property held by the taxpayer for more than 6 
     months but not more than 12 months were taken into account, 
     or
       ``(II) net short-term capital gain, reduced by 6-month 
     short-term capital gain.

     For purposes of clause (i)(I) or (ii)(I), gain may be taken 
     into account only if such gain is properly taken into account 
     on or after February 1, 1997.''
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years ending after January 31, 1997.
                                  ____


               [From the Washington Post, Apr. 30, 1995]

                   A Tax Cut That Won't Sell Us Short


      by rewarding only long-term investors, we all stand to gain

                         (By Louis Lowenstein)

       The House has passed the Contract With America Tax Relief 
     Bill of 1995 calling for not one, but two cuts in the capital 
     gains tax. The first would cut the maximum rate in half, to 
     just under 20 percent; the second would index the gain to 
     eliminate the effects of inflation. With the Treasury 
     Department estimating the 10-year cost at $92 billion, it is 
     no wonder that critics label this a giveaway to the rich.
       Speaker Newt Gingrich and his allies are right about one 
     thing--there is something wrong with the current capital 
     gains tax structure. But their remedy doesn't fix the real 
     problem, which is the refusal of today's investors to focus, 
     as they once did, more on long-term business concerns than on 
     the next twitch in interest rates, unemployment data or 
     market prices. Their solution is not only misguided but a 
     missed opportunity to correct some real wrongs in the tax 
     system.
       There is a better way: Cut the capital gains tax rate for 
     people who hold stocks for long periods, and maintain or even 
     raise the rates for short-term investors. This would reward 
     productive investment, discourage speculators and avoid a 
     costly increase in the deficit.
       Such a policy has been endorsed in one form or another over 
     the last half-century by such varied folk as Sen. Nancy 
     Kassebaum, investment banker Felix Rohatyn, financier Warren 
     Buffett and economist John Maynard Keynes--as well as by a 
     1992 Twentieth Century Fund task force on market speculation 
     and corporate governance, of which I was a member. The 
     proposal, so remarkably simple, calls for capital gains rates 
     that would decline dramatically, but only as the holding 
     period lengthens.
       In other words, the capital gains tax benefit would be 
     restricted to people who meet the traditional notion of 
     investor. The dictionary defines an investor as ``an 
     individual or organization who commits capital to become a 
     partner of a business enterprise.'' As recently as the 
     beginning of the 1960's, investors still though in terms of 
     owning a share

[[Page S893]]

     of America, as the New York Stock Exchange used to say. They 
     knew their companies and they held their stocks, on the 
     average, for seven years. For these investors, the rate could 
     be cut drastically--even to zero--after, say, 10 or 15 years. 
     That would help return stock markets to their most useful 
     function, one in which participation should be encouraged.
       Stock markets enable corporations to raise long-term 
     capital even while investors enjoy a high degree of 
     liquidity. But those markets are not an end in themselves. 
     Trading in stocks once they are issued can devolve into a 
     game of ``musical shares''; the players change places but at 
     the end of the year nothing much else happened.
       And, indeed, the concept of owning a share of American 
     business has given way to short-term speculation, 
     particularly by institutional investors. The turnover of 
     shares of New York Stock Exchange companies, which had been 
     14 percent, a year in the early `60s, soared to 95 percent by 
     the late 1980s. In 1987, the total cost of all that 
     activity--commissions and other trading costs--was about $25 
     billion, or more than one-sixth of all corporate earnings.
       That's a very different kind of market than the market, 
     say, for wheat, which moves grain from farmers to elevator 
     operators to millers to bakers to consumers. When 
     institutions trade the same shares over and over, nothing is 
     created except profits for the brokers. There is only 
     duplication and waste, not gain.
       While there is good reason to let the capital gains tax 
     drop as the holding period lengthens, there is absolutely no 
     reason to subsidize an already wasteful, frenetic trading 
     game. At present, to qualify for capital gains treatment one 
     need hold an investment position for just one year. That is 
     why the tax on restless holders should, at the very least, 
     not go down. Remember, it is mutual fund managers and other 
     so-called professionals who are the problem. They spend other 
     peoples commission dollars on their asset allocation and 
     other market-timing strategies.
       True, speculation fills gaps in trading in the market, 
     dampening price changes between trades and allowing investors 
     to accumulate or liquidate positions rapidly. But its social 
     value is limited. And while most economists rarely see a 
     market they do not admire, there is no economic reason for 
     the tax system within which the stock market must operate to 
     reinforce its worst tendencies. Even economists increasingly 
     recognize that once the market wheels have been lubricated, 
     added grease helps only the merchants of grease--the brokers.
       Worse yet, a market focused on short-term trading values is 
     far less likely to serve its fundamental goals--to allocate 
     capital to its best uses and to encourage shareholders to 
     monitor the corporate managers' performance. As one fund 
     manager said, ``It is not our job to be a good citizen at 
     General Motors.'' But if not him, who?
       The more immediate advantages of a steeply graduated 
     capital gains tax are obvious. It can be formulated to be 
     revenue-neutral, or nearly so, thus easing the budgetary 
     pressure. It would obviate the need for inflation-indexing, 
     for the simple reason that tax would fade rapidly as the 
     holding period lengthened. And for those who, like this 
     author and perhaps Gingrich too, dislike the old tax-shelter 
     programs that enriched parasites at the expense of the 
     public, a tax along the lines suggested here would discharge 
     such games. All in all, it is difficult to think of any tax 
     proposal that would accomplish so much at so little cost. The 
     same cannot be said of an across-the-board capital gains cut 
     for the rich to be paid for by the rest of us.
                                 ______