December 20, 1995

December 20, 1995 | Commentary on Taxes

Not Just A Rich Man's Issue

For decades, lawmakers who really know what makes the economy grow have been trying to cut America's capital gains tax. After all, every other industrialized nation has recognized the economic folly of penalizing thrift, responsibility and success, and has cut their capital gains tax or eliminated it entirely.

Congress's balanced-budget plan contains the most recent effort to cut the tax on capital gains. During the back-and-forth debate, President Clinton accused Congress of trying to "give a tax break to the rich."

But this simply isn't true. Based on my analysis of 1991 tax returns -- the most recent, detailed data available from the Internal Revenue Service -- more than 50 percent of the benefits of cutting capital gains taxes would go not to the wealthy, but to lower- and middle-income taxpayers. They could keep more of what they save and use their capital gains to pay educational, medical and other expenses.

Sure, cutting the capital gains tax will benefit manufacturers, retailers and other employers -- those who provide Americans with jobs, and who also may be wealthy as a result of their success. This is all to the good, because the money these people don't pay in taxes will be invested in the economy and create more jobs instead of collecting mold in the pockets of federal bureaucrats. Businesses and households spend their money better than government: When was the last time you bought a $700 hammer?

But the capital gains tax isn't just something corporate executives have to deal with. It's what gets slapped on your Uncle Joe when he sells his family business; on your retired grandparents when they sell that nest egg of General Motors stock they've been holding for 40 years; and on your parents when they sell their empty-nest home to live in an apartment. All these legitimate economic gains by middle-class American taxpayers -- many of them elderly -- shouldn't be accompanied by a huge tax bill from Uncle Sam. But they are. And it's not fair.

Especially when those who argue against a capital gains tax cut fudge on the number of "rich" people who would benefit. Politicians -- including President Clinton -- commonly distort the numbers by counting the one-time capital gain your grandparents realize on the sale of their old house as if this indicated their normal income level. In other words, if they were collecting $30,000 a year from Social Security and made a one-time $30,000 capital gain from selling their house, they would be counted as a $60,000 a year household for purposes of arguing against cutting the capital gains tax!

That's ludicrous. And it gives you an idea of the lengths some people will go to keep America from understanding what will happen when the government stops penalizing success.

The truth is that each of America's leading private economic consulting firms -- including DRI/McGraw-Hill, Wharton Econometric Forecasting Associates, and Laurence H. Meyer & Associates -- has concluded that balancing the federal budget and cutting taxes at the same time, including the capital gains tax, would result in a stronger, more productive economy. This is precisely the plan President Clinton is opposing.

For example, one of the most widely respected models of the U.S. economy -- the University of Michigan Quarterly Model -- found that combining a balanced federal budget with tax cuts would produce immediate reductions in interest rates and inflation and an upswing in long-term economic activity. When my colleagues and I at The Heritage Foundation conducted a similar study, we found not only that the economy would surge, but that most of the economic benefits hinged precisely on a cut in the capital gains tax. Without that cut, most of the benefits vanish.

The Balanced Budget Act of 1995 would cut in half the amount of money your parents are forced to pay the government when they try to collect their retirement nest egg. It would eliminate the tax liability of 3.5 million poor American families through a $500-per-child tax credit, so they wouldn't have to pay federal taxes at all, directly affecting the well-being of 8 million American children. And it would encourage a booming economy. Alan Greenspan, Federal Reserve Board chairman, recently testified before Congress that just the "expectation" of a balanced budget had caused interest rates to drop two percentage points.

But instead of admitting that Congress may have something here, and giving middle-class Americans a windfall of economic well-being, President Clinton wants to harp on the tired, class-warfare and envy rhetoric. He continues to present Congress's plan as "tax cuts for the rich."

The facts do not support this view.

William W. Beach is a visiting fellow in tax analysis at The Heritage Foundation.

About the Author

William W. Beach Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis