[Congressional Record Volume 144, Number 11 (Thursday, February 12, 1998)]
[Senate]
[Pages S731-S733]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. ALLARD:
  S. 1635. A bill to amend the Internal Revenue Code of 1986 to reduce 
the maximum capital gains rates, to index capital assets for inflation, 
and to repeal the Federal estate and gift taxes and the tax on 
generation-skipping transfers; to the Committee on Finance.


            CAPITAL GAINS AND ESTATE TAX REFORM LEGISLATION

  Mr. ALLARD. Mr. President, I spent the month of January attending 
town meetings throughout the State of Colorado. That is one of the 
things, when I go back to my State, that I spend a lot of time doing--
visiting the counties and visiting with the people of Colorado. Over 
the years, we continue to have the issue of taxes brought up in the 
town meetings--probably more so now than at any time that I can recall 
since having town meetings.
  The American people simply want to have their tax system reformed, 
particularly those in Colorado. They want lower taxes, they want a 
simpler tax system, and they want less intrusive means of collecting 
those taxes.
  Last year, Congress enacted modest tax relief, but it was only a 
first step. It's time to move forward with more aggressive tax reform.
  Today, I am introducing legislation that will do four things:
  It will continue to reduce the capital gains tax to a top rate of 14 
percent.
  It will restore the one-year holding period for capital gains 
treatment.
  It will index capital gains and, thereby, eliminate the taxation of 
gains that are due solely to inflation.
  And then, finally, it will eliminate the estate tax.
  These changes will provide important tax relief for families and 
businesses, and continue to ensure that our economy remains the most 
competitive in the world.
  Mr. President, the new year has certainly brought good news 
concerning the Federal budget. But let's be honest. The budget is 
balancing because of the hard work of the American people, not because 
of any bold action by the Federal Government. Economic performance in 
recent years has exceeded all expectations. The result is that the 
American people have been sending greater and greater amounts of their 
earnings to Washington. The budget is balancing because of an explosion 
in tax receipts, not because of any restraint in spending. In fact, the 
budget continues to grow at a healthy pace. Federal spending in 1998 is 
estimated to be 4.3 percent above the 1997 level--well in excess of 
inflation. Many would like this to continue.
  The President assured us in a previous State of the Union Address 
that, ``the era of big Government is over.'' But it is clear that he is 
now proposing a new era of big Government.
  I favor a different course. We should not squander the people's 
surplus on more Government. Instead, we should begin to pay down the 
debt and reform the tax system. We should put American families ahead 
of the insatiable appetite of Washington, DC, for more Government 
spending.
  Despite last year's budget bill, taxes remain higher than they have 
ever been. Tax freedom day--the day to which the average American works 
to pay the combined Federal, State, and local tax burden--is May 9, 
which is the latest it has ever been. A reduction in the Federal debt 
and a reasonable level of taxation should be the twin objectives of 
Congress as we enter the next century. Our job is to ensure that the 
bridge to the 21st century does not become a toll bridge.
  Mr. President, let me begin with a discussion of capital gains taxes. 
I call the capital gains tax the ``growth tax.'' Nearly all Americans 
own capital, and they experience a tax on that capital when they sell 
the stocks, or a small business, or a farm.
  Mr. President, let's look at how this capital gains, or growth tax, 
hits ordinary working Americans. Stock ownership has doubled in the 
last 7 years, to the point where 43 percent of all adult Americans own 
stock. Obviously, with those numbers, stock ownership is not just 
confined to the wealthy; it is spread throughout society. Today, half 
of the investors are women, and half are noncollege graduates. Stocks 
are typically held for retirement, education expenses, and other long-
term goals. This is precisely the type of saving and investing that we 
need in our economy.
  Mr. President, I can't leave this topic without talking about small 
business owners and farmers. There is no clearer area where the 
``growth tax'' makes no

[[Page S732]]

sense. Millions of American families put their lives into building 
small businesses and farms. Often, those businesses or farms are sold 
to finance a decent retirement. But this can only occur after Uncle Sam 
gets his cut of one-third or more of all the gains.
  Simply put, low taxation makes it less costly to take the risks that 
are critical in a capitalist economy. I am proposing that we enact a 
maximum capital gains tax of 14 percent, with those in the lowest tax 
bracket paying only 7 percent. Last year's reduction of the capital 
gains rate was a big plus, but it came with a price--the holding period 
required to qualify for the lower tax was extended from 12 months to 18 
months.
  The holding period change is a poor attempt by the Government to 
micromanage the economy. This is the type of Government management that 
has so clearly failed in Asia. A market economy functions best when 
capital flows freely, unencumbered by Government distortions. The 
holding period for long-term capital gains treatment has been 12 months 
for years, and it should stay that way.
  Mr. President, an additional mistake that Congress made in last 
year's bill was a failure to include indexing. The real ``growth tax'' 
is often much higher than 20 percent. This is because our Tax Code does 
not protect Americans from taxation on capital gains that result from 
inflation. This is one of the most unfair aspects of the growth tax. 
Government policies contribute to inflation, and Government turns 
around and taxes its citizens on that inflation.
  For this reason, I fought hard to see that indexing was included last 
year. I offered an amendment to the tax bill that would have added 
indexing. The amendment was carefully structured to avoid any revenue 
loss. Obviously, I was disappointed with the defeat of this amendment. 
I presume that this was due largely to the President's opposition to 
indexing and his veto threat. Despite this, we got a strong vote, and I 
promised that I would be back.
  I have included indexing in this bill, and I fully intend to offer 
this at each opportunity. Some have dismissed indexing as ``too 
costly,'' but for me this is an issue of fundamental fairness. It is 
wrong for the Federal Government to tax citizens on inflation.
  Since I mentioned the issue of cost, let me make a few points on 
this. I have long maintained that a capital gains tax cut will increase 
revenue. In the short run, it encourages the sale of assets that would 
not otherwise occur. This obviously increases revenue.

  In the long run, a rate cut facilitates a higher level of economic 
growth. This also results in greater tax revenue.
  Unfortunately, during last year's tax debate, we continued to operate 
under revenue models that forecast a loss to the government from the 
capital gains rate cut.
  I hope we can soon put this notion to rest for good.
  It is already apparent that capital gains revenues will be coming 
into the Treasury at a considerably higher level than forecast last 
year when we were talking about capital gains. 1998 capital gains 
revenues could be as much as 50% higher than previously forecast.
  Even state governments will benefit from the rate cut. Earlier this 
month, analysts for the Colorado Legislature forecast that the capital 
gains tax changes would result in an additional $38 million this year 
for the Colorado state budget.
  Obviously, the impact at the federal level will be many times 
greater.


                         estate tax elimination

  The final provision in this tax bill is the elimination of the estate 
tax.
  Frankly, the estate tax makes no sense.
  While the tax raises only 1 percent of federal revenues, it destroys 
family businesses and farms.
  The estate tax is double taxation.
  At the time of a person's death, much of their farm, business, and 
life savings has already been subjected to federal, state, and local 
tax. These same assets are taxed again under the estate tax.
  The estate tax fails to distinguish between cash and non-liquid 
assets.
  Family businesses are often asset-rich, and cash poor. But the value 
of all assets must be included in the taxable estate.
  This can force liquidations, and family businesses can see their 
livelihood eliminated in order to pay a tax of up to 55 percent. Yes. 
That is right--up to 55 percent.
  This practice threatens the stability of our families and communities 
while inhibiting growth and economic development.
  The National Center for Policy Analysis reports that a 1995 survey by 
Travis Research Associates found that 51 percent of family businesses 
would have difficulty surviving the estate tax, 14 percent of business 
owners said it would be impossible to survive, 30 percent said they 
would have to sell part or all of their business.
  This is supported by a 1995 Family Business Survey conducted by 
Matthew Greenwald and Associates which found that 33% of family 
businesses anticipate having to liquidate or sell part of their 
business to pay the estate tax.
  Recently, the accounting firm Price Waterhouse calculated the taxable 
components of 1995 estates. While 21% of assets were corporate stock 
and bonds, and another 21% were mutual fund assets, fully 32% of gross 
estates consisted of ``business assets'' such as stock in closely held 
businesses, interests in non-corporate businesses and farms, and 
interests in limited partnerships. In larger estates this portion rose 
to 55%.
  Clearly, a substantial portion of taxable estates consists of family 
businesses.
  The recent tax bill increased the estate tax exemption from $600,000 
to $1 million. However, this is done very gradually and does not reach 
the $1 million level until 2006. The bill also increased the exemption 
amount for a qualified family owned business to $1.3 million. While 
both actions are a good first step, they barely compensate for the 
effects of inflation. The $600,000 exemption level was last set in 
1987, just to keep pace with inflation the exemption should have risen 
to $850,000 by 1997.
  Incremental improvements help, but we need more substantial reform. 
It is time to eliminate this tax entirely. This action has been taken 
in countries such as Australia and Canada. Unfortunately, the United 
States retains what are arguably the highest estate taxes in the world.
  Among industrial nations, only Japan has a higher rate than the U.S. 
But Japan's 70% top rate applies only to inheritance of $16 million or 
more. The U.S. top rate of 55% kicks in on estates of $3 million or 
more. France, the United Kingdom, and Ireland all have top rates of 
40%, and the average top rate of OECD countries is only 29%.
  Repeal of the estate tax would benefit the economy. George Mason 
University Professor Richard Wagner estimates that within seven years 
of elimination of the estate tax the output of the country would be 
increased by $79 billion per year, resulting in up to 228,000 new jobs. 
Under the current system, the energy that could go into greater 
productivity is expended by selling off businesses, dividing resources 
and preparing for the absorption of an estate by the government. Those 
businesses that survive the estate tax often do so by purchasing 
expensive insurance. A 1995 Gallup survey of family firms found that 
23% of the owners of companies valued at over $10 million pay $50,000 
or more per year in insurance premiums on policies designed to help 
them pay the eventual tax bill.
  The same survey found that family firms estimated they had spent on 
average over $33,000 on lawyers, accountants and financial planners in 
order to prepare for the estate tax.
  Ironically, the estate tax is often justified on the grounds that it 
helps to equalize wealth. But this effect is greatly exaggerated. A 
1995 study published by the Rand Corporation found that for the very 
wealthiest Americans, only 7.5% of their wealth is attributable to 
inheritance--the other 92.5% is from earnings.
  Mr. President, it is time to repeal this outdated tax. We must insist 
that no more American families lose their business because of the 
estate tax. We must ensure that when a family is coping with all the 
inevitable costs of passing a business from one generation to the next, 
the Federal Government is not there as an added burden.
  Mr. President, it is my hope that by introducing this tax legislation 
and placing these proposals on the table we can begin to debate 
significant tax relief for 1998.

[[Page S733]]

  Each of these changes: a lower capital gains rate, indexing, and 
repeal of the estate tax, are consistent with long-term tax reform. And 
each of them can be enacted this year.
                                 ______