[Congressional Record Volume 147, Number 58 (Wednesday, May 2, 2001)]
[Senate]
[Pages S4182-S4183]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH (for himself, Mr. Torricelli, Mr. Kyl, and Mr. 
        Murkowski):
  S. 818. A bill to amend the Internal Revenue Code of 1986 to provide 
a long-term capital gains exclusion for individuals, and to reduce the 
holding period for long-term capital gain treatment to 6 months, and 
for other purposes; to the Committee on Finance.
  Mr. HATCH. Mr. President, on behalf of myself and Senator Torricelli, 
I rise today to introduce the Capital Gains Relief and Simplification 
Act of 2001. We are joined by Senators Kyle  and Murkowski, each of 
whom contributed to the development of this bill. This is a strong, 
bipartisan capital gains tax cut package designed to help all 
investors, but is aimed directly at small investors first.
  This bill takes a bottom-up approach to capital gains relief, but 
offers reduced capital gains rates to all taxpayers. But this is not 
all. The bill also offers a great deal of simplification for all 
taxpayers with capital gains to report on their tax returns. Both of 
these features are important because investment in capital assets has 
become such an important part of the lives of most Americans.
  In looking at the issue of capital gains in 2001, Mr. President, 
three things are clear. First capital gains and losses are experienced 
by ordinary Americans and are not just the province of the wealthy. 
Second, the reporting of capital gains transactions on the tax return 
has grown very complex and burdensome, and third, capital gains tax 
rates are too high. These all add up to the need for capital gains 
relief, and this is what our bill is designed to address.
  Long gone are the days when anyone can credibly say that capital 
assets are only, or even mostly, owned by the rich. A 1992 Treasury 
study showed that about three-quarters of all families in the U.S. 
owned capital assets, and this percentage has grown higher since then. 
That same study showed that 30 percent of the dollar value of all 
capital assets, excluding personal residences, was held by families 
with incomes of $50,000 or less in 1992.
  More recent data confirm that more and more U.S. families own capital 
investments. A survey last year by the Federal Reserve showed that 
stock made up nearly 32 percent of U.S. household wealth in 1999, up 
from 28 percent the year before. Moreover, another Federal Reserve 
study showed that in 1998, almost 49 percent of all families directly 
or indirectly held stock. Among families with annual income of between 
$25,000 and $50,000, the level was almost 53 percent.
  When looking at data on who pays capital gains taxes, we find that 
many lower- and middle-income Americans are reporting capital gains. In 
fact, IRS data from the year 1998, the latest available, show that over 
25 million returns filed that year reported capital gains. This is 
about one in five tax returns filed in 1998. Over 40 percent of those 
reporting capital gains had income of less than $50,000, and 59 percent 
had income of less than $75,000. Moreover, when looking at the dollar 
amount of gains reported, we find that 56 percent of all capital gains 
in 1998 were claimed by taxpayers with incomes of under $75,000.
  I believe it is very clear, that capital gains relief is not just for 
wealthy Americans. It is very much needed by the average American 
family. It is also clear that reporting capital gains is very complex 
for most taxpayers.
  Millions of Americans hold investments in mutual funds. In fact, 
according to the Joint Economic Committee, 44 percent of all U.S. 
households owned mutual funds in 1998, up from just 6 percent in 1980. 
Most of these mutual funds annually distribute dividends and capital 
gains to their owners, which must be reported as income on Form 1040 
each year. This can be a rather confusing process for many investors, 
for several reasons.
  First, many mutual fund owners routinely reinvest the dividend and 
capital gains income back into the fund, rather than taking them in 
cash. Because they receive no cash, it comes as a surprise to some that 
they must pay tax on the gains at all. Many mutual fund investors were 
particularly dismayed this past tax filing season, because they had to 
report capital gains from funds that had decreased in value.
  Second, when mutual fund owners sell their interest in a fund, 
computing the capital gain or loss on the sale can be daunting, 
particularly if the individual had been reinvesting the dividends and 
capital gains back to the fund.
  Finally, after figuring out what capital gains have been received and 
how much should be reported, and any gain or loss from a sale of the 
fund, mutual fund owners, like other investors in capital assets, must 
then deal with the challenge of reporting capital gains on the 
complicated Schedule D of Form 1040. This form is confusing at best and 
exasperating at worst. It consists of 54 lines on two pages, and is 
accompanied by an 8-page set of instructions with two worksheets. The 
estimated time to complete this form, according to IRS estimates, is an 
astounding 6 hours and 48 minutes.
  Finally, it is clear that capital gains tax rates are too high. In 
fact, a new report by Arthur Andersen LLP shows that the average 
middle-income individual investor faces a combined state and federal 
capital gains tax burden of 25 percent on long-term capital gains. I 
want to emphasize that this is the average rate across the U.S. In some 
states, including my home state of Utah where the rate is 27 percent, 
the burden is even higher.
  These figures may surprise some of our colleagues. After all, many 
members of this body were present in 1997 when we reduced the maximum 
capital gains tax rate from 28 percent to 20 percent. The fact is, 
however, that most states tack a relatively high additional tax on the 
federal capital gains rate to produce this 25 percent average capital 
gains tax rate.
  This is particularly important in light of the fact that the United 
States still taxes capital gains more heavily than do most other 
countries. In fact, a recent survey of 24 industrial and developing 
countries taken by the American Council for Capital Formation's Center 
for Policy Research showed an average capital gains rate of 14.5 
percent. This is more than 10 percent above the combined average 
federal-state U.S. rate.
  The Capital Gains Relief and Simplification Act we are introducing 
today is designed to address the problem of too high a tax rate as well 
as the complexity problem, in a way that is directed to all taxpayers, 
but especially those in the middle- and lower-income groups.
  Let me briefly describe this bill. First, it provides a 100 percent 
exclusion for the first $1,000 in capital gains for every individual 
taxpayer. This would be $2,000 for a married couple filing a joint 
return. Individuals with capital gains below these thresholds

[[Page S4183]]

would generally not even have to file the confusing Schedule D. Totally 
avoiding a complex tax form is the ultimate in simplification.
  Second, for individual capital gains above the $1,000 (or $2,000) 
exclusion threshold, the bill provides a 50 percent deduction. The 
effect of this would be to lower an individual's top capital gains tax 
rate to exactly half the ordinary income rate. If for example, under 
current law an investor's marginal tax bracket is 31 percent, the top 
capital gains rate for that investor would be 15.5 percent.
  This deduction approach offers both simplicity, and a greater 
reduction in rates for those in the lower tax brackets than for those 
in the highest brackets. For example, compared with current law, a 
taxpayer in the highest tax bracket of 39.6 percent would find his or 
her top capital gains tax rate cut from the current 20 percent to 19.8 
percent under this bill. An investor in the 28 percent bracket, 
however, would see his or her top capital gains rate drop from the 
current 20 percent to 14 percent.
  Moreover, under this bill investors would see further capital gains 
tax rate cuts as the ordinary income tax rates are reduced, as under 
President Bush's tax plan. For example, those in the proposed 25 
percent rate bracket would enjoy a top capital gains rate of just 12.5 
percent, while those in lower brackets would see even lower capital 
gains rates, to the extent their capital gains exceeded the 100 percent 
exclusion thresholds.
  Furthermore, this 50 percent deduction approach also helps with the 
problem I mentioned before of high combined federal and state capital 
gains tax rates. Most states use the federal adjusted gross income, 
AGI, as a starting point for determining state income tax liability. 
Thus, under current law, all of an investor's capital gains are 
generally included in the state tax base. Under this bill's exclusion 
approach, only 50 percent of capital gains over the exclusion would be 
included in the federal AGI. This means most states would generally 
only tax a fraction of the investor's capital gains. Therefore, this 
bill would result in lower federal and state taxes on capital gains.
  I would like to mention several other features of the bill. First, it 
would reduce the holding period of long-term capital gains from one 
year to six months. According to Bruce Bartlett, a well-known economist 
with the National Center for Policy Analysis, a holding period 
requirement for favorable capital gains treatment has several economic 
costs to investors, the consequences of which may reduce the level of 
investment. Among these economic costs are a reduction in liquidity and 
the creation of a lock-in effect that can cause the prices of stock to 
vary from its real value. Reducing the holding period will reduce these 
costs and may also increase revenue to the Treasury from capital gains.
  Second, the bill increases the amount of capital loss an individual 
may deduct against ordinary income. Under current law, an individual's 
capital gains are taxed from the first dollar to the last dollar. 
However, if an individual suffers a capital loss, and has no capital 
gains to use to offset the loss, he or she is allowed to deduct only 
$3,000 of the loss against ordinary income. This is unfair and the 
amount is too low. Our legislation helps alleviate this problem by 
increasing the $3,000 figure to $10,000 and indexing it for future 
inflation.
  Finally, the Capital Gains Relief and Simplification Act includes two 
provisions to help taxpayers who sell their homes and want to take 
advantage of the principal residence exclusion enacted in 1997. The 
first one addresses a problem that members of the U.S. uniformed 
services and Foreign Service sometimes suffer when called away from 
their homes for work-related purposes. In many cases, they return from 
these assignments and want or need to sell their principal residence. 
Because they do not meet the five-year ownership and use test, however, 
they are denied the full use of the present law exclusion. This bill 
corrects this inequity by suspending this test during such absences. 
The provision would also apply to individuals relocated outside the 
United States by their employers.
  The second provision merely indexes for inflation the $250,000 and 
$500,000 thresholds for purposes of the principal residence exclusion. 
While these levels might have seemed adequate in 1997, and perhaps even 
in 2001, inflation will soon cause these thresholds to be worth far 
less than Congress intended when crafting this provision. We should 
adjust them now.
  This bill represents a win for everybody. All investors win because 
it would significantly lower the capital gains tax rate and simplify 
their lives at tax time. Small investors especially win because all or 
much of their capital gains would escape taxation altogether and they 
would avoid much of the complexity they currently face with Schedule D. 
All Americans win because reducing capital gains would increase 
economic growth and job creation.
  I urge my colleagues on both sides of the aisle to take a close look 
at this legislation and join us in lowering taxes on millions of 
Americans and striking an important blow for tax simplicity at the same 
time.

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