[Congressional Record Volume 144, Number 61 (Thursday, May 14, 1998)]
[Senate]
[Pages S4846-S4847]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                   REDUCTION IN THE CAPITAL GAINS TAX

  Mr. ALLARD. Mr. President, earlier this year, I introduced S. 1635, 
legislation to reduce the capital gains tax to 14 percent and to 
provide indexing of capital gains.
  This legislation builds on last year's tax bill, which moved the 
capital gains rate down from 28 percent to 20 percent. Last year's tax 
change was a good first step, but I favor a more aggressive approach to 
tax reform.
  The U.S. level of tax on capital has been among the highest in the 
world. I am dedicated to seeing that it becomes one of the lowest in 
the world. A low rate of tax will encourage capital investment, 
economic growth, and job creation.
  This is no time for the United States to sit on its lead; We must 
continue to ensure that America is the premier location in the world to 
do business. A low capital gains tax will help our economy, but it will 
also help America's families by reducing their tax burden.
  Mr. President, the profile of the average stock market investor is 
changing rapidly. To make this point, I would like to refer now to a 
chart that outlines the tremendous growth in stock ownership among 
middle class Americans. This reflects a recent study commissioned by 
the NASDAQ stock market, which determined that 43 percent of adult 
Americans now invest in the stock market. This is double the level of 
just 7 years ago.
  Investing is no longer the exclusive province of the elderly, 
affluent, or male. A majority of the investors are under 50 years of 
age, 47 percent of the investors are women, and half of the investors 
are not even college graduates. Most working-age investors describe 
themselves as blue- or white-collar workers rather than managers or 
professionals. I think that this rather dramatically reflects the 
change in the makeup of the investor on the stock market.
  In addition to investing in the stock market, millions of Americans 
own small businesses and farms, and they certainly feel the impact of 
any tax on capital assets.
  Mr. President, while a cut in the capital gains tax rate would help 
investors and their families, it is also likely to increase tax 
revenues. At first, this may seem odd, but there are two principal 
reasons that a cut in capital gains taxes increases revenues. First, 
there is the short-term incentive to sell more capital assets. Second 
is the long-term progrowth benefit from a capital-friendly tax policy.
  Let me first discuss the short-term incentive to sell more assets. In 
order to understand this concept, one has to first recognize that the 
capital gains tax is largely a voluntary tax; the tax is only paid if 
the investor chooses to sell the asset. If taxes are high, the investor 
can hold on to the asset for years. But when taxes are dropped down, 
lowered, investors will often decide to sell the assets and realize the 
capital gain.

  History confirms this pattern. In 1978, when the capital gains tax 
rate was reduced from 40 percent to 28 percent, capital realizations 
increased by 50 percent and tax receipts increased. In fact, it was 
done at that particular point in our country's history to stimulate the 
economy.
  In 1981, Congress and President Reagan further reduced the capital 
gains tax rate to 20 percent. Once again, capital realizations 
increased dramatically. And by 1983, they were again up by 50 percent. 
In fact, during the period from 1978 to 1983, capital gains tax rates 
were cut in half. But by the end of the period, the Federal Government 
was receiving twice as much revenue from capital gains taxes.
  I would like to emphasize that point by turning to a chart which 
compares the level of capital gains tax with tax revenue over a 20-year 
period, running from 1976 and projecting out to the end of 1997. As the 
chart clearly shows, the tax rate was cut in half between 1997 and 
1983, right in this time period here, and the revenues more than 
doubled, from $9 billion in 1978 to nearly $19 billion by 1983. This 
was not a temporary blip. As the chart shows, revenues continued to 
rise through the 1980s.
  The underlying point is proven dramatically, I think, in 1986. What 
happened in 1986 is this: Congress voted to increase the capital gains 
tax to 28 percent. This was a 40 percent increase in the tax rate then 
in place. But the new, higher rate was delayed until January 1 of 1987. 
What we saw then was a massive sale of assets through 1986, while the 
rate was still 20 percent. Investors rushed to sell their assets before 
the higher 28 percent went into effect.
  If we look again at the chart, we find that capital gains revenues, 
after 1986, began a nearly 5-year decline. In fact, despite the much 
higher tax rate, by 1991, capital gains revenues were actually at their 
lowest level since 1984.
  Mr. President, the pattern should be clear by now. But I would like 
us to take one more look at this issue by reviewing the revenue 
estimates associated with last year's cut in the capital gains tax 
rate. Any time Congress considers tax changes, it is required to 
estimate the revenue impact of those changes. This task falls 
principally on the Joint Committee on Taxation, which relies on data 
compiled by the Congressional Budget Office. Current law requires 
revenue estimates to stretch 10 years into the future.
  Last year, when Congress proposed to cut the capital gains rate from 
28 to 20 percent, the Joint Committee on Taxation submitted its revenue 
estimate.
  Despite forecasting an initial pick up in revenue due to greater 
realizations, JCT forecast a 10 year revenue loss from the rate cut of 
$21 billion.

[[Page S4847]]

  The JCT and CBO estimates now appear to have dramatically 
underestimated the strength of the economy and the positive response to 
the tax rate cut.
  The JCT forecast last July that capital gains revenue for 1998 would 
be $57 billion after the rate cut.
  Again, this is reflected here on the chart projecting a much lower 
impact, actually a loss that we will end up with. In the shaded area 
over here with the lines drawn we see a dramatic increase in revenue 
that happened to the Federal Government, just contrary to what our 
``budgeteers'' were projecting when we initiated the capital gains 
reduction in rate.
  Recently, I contacted the CBO and JCT to determine how the forecast 
was holding up.
  The Congressional Budget Office is now anticipating that both the 
1997 and 1998 capital gains realizations will be much higher than 
previously thought.
  It is therefore reasonable to assume that even with a lower tax rate, 
capital gains tax revenues for 1997 and 1998 will be a good deal higher 
than previously forecast.
  The irony here is that the entire 10 year revenue loss that was 
forecast may be made up for in the first several years of the rate cut.
  Once again, we will have a situation where a tax rate cut leads to 
greater revenues.
  Mr. President, what does all this tell us?
  In my view, a review of the last twenty years of capital gains tax 
rates and the associated revenues suggests that the model used by JCT 
and CBO to estimate capital gains revenues is flawed.
  At minimum, it would appear that when tax rates are lowered the model 
significantly exaggerates the revenues losses.
  In fact, in no single year after a rate cut has there ever been a 
loss of revenue.
  Conversely, when tax rates are increased, the model significantly 
exaggerates the level of revenue gains.
  Not only do the Congressional models fail to accurately measure the 
response of taxpayers to changes in tax rates, they completely exclude 
any estimate of the impact of tax changes on economic performance.
  Mr. President, up to this point we have only been discussing the 
short term behavioral changes that come from changes in the capital 
gains tax rate.
  What about the longer term impact on economic growth? Congress is 
largely in the dark when it comes to any estimate of this benefit.
  It is logical to assume that a lower tax rate on capital encourages 
capital formation. A higher rate of capital formation clearly benefits 
the economy. As a consequence the federal government will realize 
greater income, payroll, and excise taxes. In addition, state and local 
tax revenues will also rise.
  Admittedly, all of this is difficult to measure. However, I would 
like to see some attempt made to include these factors in revenue 
models.
  At a minimum they should be appended to the official revenue 
estimates. This would give Congress a more complete picture of the 
impact of tax changes on revenues.
  As I review the issue of capital gains tax revenues I am struck by 
several things.
  First, capital gains tax rate cuts do not appear to cost the 
government revenue, and may in fact increase revenue rather 
dramatically.
  Second, the current revenue estimating model should be updated to 
reflect evidence that the model exaggerates losses from rate cuts, and 
also exaggerates the gains from tax rate hikes.
  In addition, some attempt should be made to measure the impact of tax 
changes on the level of economic performance.
  Third, less emphasis should be placed on the revenue models.
  Instead, greater emphasis should be placed on the impact that changes 
in the tax treatment of capital gains will have on the private economy.
  Economic growth, job creation, and international competitiveness 
should be our focus, not projections of government revenue.
  This is particularly true when we know that the revenue projections 
are not likely to be terribly accurate.
  This is not intended as a criticism of those whose job it is to make 
the estimates. This is difficult work. I certainly recognize this 
having served on the House Budget Committee for several years. And 
those who do the work are professionals who work hard at getting it 
right.

  Unfortunately, this business is a bit like gazing into a crystal 
ball. There are just too many factors at work to think we can 
accurately project the revenue impact of changes in capital gains tax 
policy.
  Mr. President, when it comes to capital gains taxes I suggest that 
Congress spend less time gazing into the crystal ball of revenue 
forecasting, and more time focusing on the real world impact of taxes 
on capital formation, job creation, and economic growth.
  I think it will then be abundantly clear that we should continue to 
reduce the tax on capital to 14 percent. This will continue the good 
work that we began last year.
  Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The assistant legislative clerk proceeded to call the roll.
  Mr. SMITH of Oregon. Mr. President, I ask unanimous consent that the 
order for the quorum call be rescinded.
  The PRESIDING OFFICER (Mr. Hutchinson). Without objection, it is so 
ordered.

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