[Congressional Record Volume 144, Number 91 (Friday, July 10, 1998)]
[Senate]
[Pages S7919-S7920]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                             CAPITAL GAINS

  Mr. ALLARD. Mr. President, I wish to speak about capital gains and 
the way that we look at the estimates that come from a reduction in 
taxes such as capital gains.
  Earlier this year, I introduced legislation to reduce the capital 
gains tax to 14 percent and to provide indexing of the capital gains 
tax from that point out. This legislation builds on last year's tax 
bill which moved the capital gains rate down from 28 percent to 20 
percent.
  I rise today to commend both the Senate majority leader and the 
Speaker of the House for their recent calls for a reduction in the top 
capital gains rate to 15 percent. Both of our leaders have indicated 
they are introducing legislation to cut the rate. This could be 
accomplished as early as this year. Again, I commend them for their 
leadership.
  I also wish to express my support for a provision in the IRS reform 
bill that returns the holding period for long-term capital gains 
treatment to 12 months. Last year, the administration unwisely insisted 
on extending this out to 18 months. This added complexity to the code 
and represented another attempt by Government to micromanage investment 
decisions.
  There is a great deal of interest in the tax treatment of capital 
gains due to mounting evidence that capital gains tax rate reductions 
not only benefit taxpayers and the economy but also increase revenues.
  Last month, the Joint Tax Committee released new estimates of the 
revenue resulting in the 1997 reduction of the top capital gains rate 
from 28 percent to 20 percent. The Joint Tax Committee apparently 
underestimated the revenue gain in 1998 by $13 billion and in 1999 by 
$12 billion. In fact, the latest estimates are that over the first 5 
years revenue could be as much as $58 billion greater than previously 
forecast.
  Now, this does not surprise me. In fact, there are a number of us in 
Congress who have been making this very point for years. The capital 
gains tax rate cut will increase revenue, not reduce it. There are two 
principal reasons for this increase in revenue. 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.
  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, an investor can hold on to the asset for years. 
But when taxes are low, 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 1981, Congress and President Reagan further reduced the capital 
gains tax rate to 20 percent. Once again, capital gain realizations 
increased dramatically and by 1983 were again up by 50 percent.
  By contrast, tax revenues actually dropped for a number of years 
following the capital gains tax rate hike in 1986.
  Mr. President, last year, when Congress proposed to cut the capital 
gains tax rate from 28 percent to 20 percent, the Joint Tax Committee 
submitted its revenue estimate.
  The Joint Tax Committee forecast a 10-year revenue loss from the rate 
cut of $21 billion.
  Mr. President, it is clear that the Joint Tax Committee and 
Congressional Budget Office estimates dramatically underestimated both 
the strength of the economy and the positive response to the tax rate 
cut.
  The Joint Tax Committee now concedes that there will be a significant 
revenue gain from capital gains realizations.
  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 the 
Joint Tax Committee and the Congressional Budget Office to estimate 
capital gains revenues is flawed.
  The Congressional Budget Office argues that government revenue 
estimates adequately account for behavioral changes that occur as a 
result of tax changes.
  Despite this claim, it would appear that when tax rates are lowered 
the revenue estimating model significantly exaggerates the revenue 
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 exclude an estimate 
of the impact of tax changes on economic performance.
  Congress is largely in the dark when it comes to any estimates of the 
economic benefit of tax rate reductions.
  It is logical to assume that a lower tax rate on capital lowers the 
cost of capital. This 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 always be appended to the official revenue 
estimates. This would give Congress a more complete picture of the 
impact of tax changes on revenues.
  Mr. President, I will note that a recent addition to the rules of the 
House permits the Joint Committee on Taxation to append dynamic 
estimates to tax legislation when requested to do so by the Chairman of 
the Ways and Means Committee.
  This dynamic estimate is to reflect the anticipated macroeconomic 
effects

[[Page S7920]]

of tax legislation, and is to be used solely for informational 
purposes.
  It is time for Congress to build on this process. Dynamic estimates 
should be routinely requested in both the House and Senate.
  Congress should also make greater use of the work of a multitude of 
economists. I would note for example that in 1997 the Joint Economic 
Committee published a study by two Florida State University economics 
professors; James Gwartney and Randall Holcombe that argued that the 
optimal capital gains rate is 15 percent or less.
  These economists predicted accurately prior to last year's rate cut 
that a reduction in the rate would increase revenues.
  While improvements in the revenue estimating process are certainly 
desirable, the fact remains that estimates are just ``estimates'', and 
Congress should recognize that those estimates will often turn out to 
be way off the mark.
  That is why Congress should place greater emphasis on the impact that 
changes in the taxation will have on the private economy, and less 
emphasis on projections of government revenue.
  Economic growth, job creation, and international competitiveness 
should be our focus.
  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, 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.
  I look forward to working with Majority Leader Lott and with Speaker 
Gingrich as we continue to cut the rate of taxation on capital gains.
  I yield the balance of my time.
  Mr. MOYNIHAN addressed the Chair.
  The PRESIDING OFFICER. The Senator from New York is recognized.
  Mr. MOYNIHAN. Mr. President, I ask that I be granted 10 minutes to 
speak in morning business.
  The PRESIDING OFFICER. The Senator has 10 minutes under the previous 
order.

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