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CAPITAL-GAINS TAX.
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Pros & cons of arguments involving reduction in tax rate for capital gains, tax on inflation, cost of capital, creating short-term windfall.... More...
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Paper Abstract:
Pros & cons of arguments involving reduction in tax rate for capital gains, tax on inflation, cost of capital, creating short-term windfall.

Paper Introduction:
INTRODUCTION This research explores the capital-gains tax issue in the United States. The major controversy concerns whether or not to reduce the tax rate on capital-gains to some level below that for ordinary income, which is the basis for the taxation of capital-gains under the Tax Reform Act (TRA) of 1986. Although the proposal by the Bush Administration to reduce the tax rate on capital-gains was defeated in the Senate in the fall of 1989, the issue remains very much alive (Yang, 1989). The nation's media generally and the Bush Administration more specifically have attempted to portray the controversy over the capital-gains tax as a liberal/conservative clash. Such a depiction suits the Administration, because, as was true of the Reagan Administration which preceded it, it hopes to make points

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CONCLUSION Each of the four arguments considered in this exploration are valid.To base a position on the acceptance of the two pro arguments would be toreject two valid con arguments, and vice versa. K. Rostenkowski, D. W.. Congressional Digest, pp. Asecond sound argument against a reduction in the tax on capital-gains isthat, over the long-term, federal governmental revenues losses stemmingfrom such a reduction will increase the federal budget deficit, therebyharming the overall economy (Stenholm, 199 ). A strong defense of this argument is that indexing capital-gains forinflation not only reduces or eliminates an inequitable tax penalty, butthat it would also stimulate investment. The Wall Street Journal, p. Summers, L. Thus, if a capital-gains tax cut is effected, additional, simultaneous action is required tooffset any adverse impacts on the budget deficit. Capital gains tax cut: For therich . The Wall Street Journal, p. (199 , January). Congressional Digest, pp. One of the nation's principal economic worries is the internationaltrade deficit, particularly the bilateral trade deficit with Japan. S. B3.----------------------- 1 In spite of all the political rhetoric on the conservative side, andall of the efforts by liberals to cast aspersions on a capital-gains taxcut as a means of promoting their own pet tax reform, there remain severalsound arguments both pro and con on the issue. A28. . Congressional Digest, pp. (199 , January). (1989, October 3 ). Galbraith, J. Dornan, R. INTRODUCTION This research explores the capital-gains tax issue in the UnitedStates. The Wall Street Journal, p. Floor debate in the U. Although the proposal by the Bush Administration to reducethe tax rate on capital-gains was defeated in the Senate in the fall of1989, the issue remains very much alive (Yang, 1989). Panetta, L. 14, 16. (199 , January). S. 17, 19, 21. The most cogent of the fourarguments in the short-term is the need to reduce the country's cost ofcapital, because enhanced American competitiveness is required-now--notlater. Floor debate in the U.S. The most cogent argument against a capital-gains tax cut is thelong-term adverse impact on the federal budget deficit. House ofRepresentatives, 28 September 1989. ((1989, September 14). Capital-gains tax cut plan couldresurface. Houseof Representatives, 28 September 1989. Be a man, congress--raisetaxes. Thecost of capital in the United States is triple that in Japan. Congressional Digest, pp. 9-11. Cal., has beenkicking the dead socialist horse as hard as he can on the capital-gains taxissue, in defending the Administration's position on the floor of thehouse. (199 , January). 14. THE ARGUMENTS FOR AND AGAINST A REDUCTION IN THE TAX RATE FOR CAPITAL GAINS There exists a wide variety of arguments both in support of and inopposition to proposals to reduce the tax rate on capital-gains. 25, 27,29. (1989, October 4). Congressional Digest, p. Floor debate in the U. S. All of these argumentscannot be considered in this brief exploration. This argument is sound, becausethe beneficiaries of such indexation would not be investors in the stockmarket or some other speculative-driven activity, but, rather, would beinvestors in the small-to- medium-sized business sector (Summers, 1989).Reducing the Cost of Capital: Pro This argument favoring a capital-gains tax cut holds that such a cutwould bring the cost of capital in the United States more nearly in linewith international norms, which, in turn, would enable Americanmanufacturers to become more competitive internationally (Archer, 199 ).Most of America's major international competitor nations either have nocapital-gains tax, or have a very low, nominal rate tax. K. Each of thesearguments has a sound basis in economic theory.Arguments Opposing A Capital-Gains Tax Cut A sound argument opposing a capital-gains tax cut is that the BushAdministration proposal for a dramatic two-year reduction followed by alater increase in the tax on capital gains would simply provide a windfallfor the rich, who would take the money and run, and, because the capital-gains tax would be increased in just two years, would not reinvest themoney in the way projected by the Administration (Rostenkowski, 199 ). S. In fact, this two-step proposalwould benefit primarily the wealthy (Pechman, 1989), and, as opposed to anhonest pursuit of a capital-gains tax reduction, it is, in fact, simply abudgetary ploy to permit the Administration to avoid proposing programcuts, and avoid proposing tax increases, while skirting the spirit of thedeficit reduction law, if not the letter (Birnbaum, and Rogers, 1989).Long-Term Budget Deficit Increase This argument against a reduction in the tax on capital gains holdsthat, over the long-term, federal governmental revenues losses stemmingfrom such a reduction will increase the federal budget deficit, therebyharming the overall economy (Stenholm, 199 ). The nation's media generally and the Bush Administration morespecifically have attempted to portray the controversy over the capital-gains tax as a liberal/conservative clash. While notall of the differential is attributable to the American tax on capital-gains, a significant portion of this differential does stem from the tax oncapital-gains.Creating A Short-Term Windfall: Con This argument opposing a capital-gains tax cut holds that the BushAdministration proposal for a dramatic two-year reduction followed by alater increase in the tax on capital gains would simply provide a windfallfor the rich, who would take the money and run, and, because the capital-gains tax would be increased in just two years, would not reinvest themoney in the way projected by the Administration (Rostenkowski, 199 ). ----. A second strongargument favoring a capital-gains tax cut is that such a cut would bringthe cost of capital in the United States more nearly in line withinternational norms, which, in turn, would enable American manufacturers tobecome more competitive internationally (Archer, 199 ). (199 , January). Floor debate in the U.S. Even The New YorkTimes (1989), which editorially opposes a tax cut for capital-gains,acknowledges the validity of this argument, and supports such indexationfor future investments in corporate equity. Capital-gainstax fight causes some liberals and conservatives to switch usual alliances. Yang, J. Therefore, four of themost significant of these arguments--two pro and two con--have beenselected for a more detailed assessment of the issue.Arguments Supporting A Capital-Gains Tax Cut A strong argument favoring a reduction in the tax rate for capital-gains is that much of what is currently taxed as capital gains, in fact,represents nothing more than changes in nominal values of assets resultingfrom inflation in the general economy (Archer, 199 ). Capital gains tax: Summaries of majorproposals. Such a depiction suits theAdministration, because, as was true of the Reagan Administration whichpreceded it, it hopes to make points with the public by avoiding adiscussion of hard facts, and, instead, deal with the issue on an emotionallevel where it can blame all of the nation's troubles on evil liberals andsocialists. To aide the poor, cut capital gainstaxes. To arrive at a position onthe proposal to cut the tax on capital-gains, based on these fourarguments, therefore, it is necessary to determine how the greatest overallbenefit for the country can be attained. H. Wanniski, J. Capital gains break--wrong! In point of fact, arguments on the capital-gains tax issue cut acrossliberal/conservative lines, to a point where an attempt to assess the issuestrictly in terms of American liberal and conservative political ideologiestends to obfuscate the points of contention (Birnbaum, and Rogers, 1989).A more effective assessment of the issue may be obtained through aconsideration of the arguments on their merits, without invoking liberaland conservative bogeymen from America's political closet. (1989, August 3). Pechman, J. Birnbaum, J. Stenholm, C. (1989, September 27). References Archer, B. House ofRepresentatives, 28 September 1989. Congressional Digest, pp. House ofRepresentatives, 28 September 1989. (199 , January). The arguments are assessed separately.Eliminating the Tax on Inflation: Pro This argument favoring a reduction in the tax rate for capital-gainsholds that much of what is currently taxed as capital-gains, in fact,represents nothing more than changes in nominal values of assets resultingfrom inflation in the general economy (Archer, 199 ). That intellectual giant and stalwart defender of theconservative cause, Representative Bob Dornan (199 ), R. The New York Times, p. The New YorkTimes, p. Floor debate in the U. Each of these arguments hasa sound basis in economic theory. . ASSESSMENT OF THE SELECTED PRO AND CON ARGUMENTS Each of the four arguments identified in the preceding section isassessed in this section. A24. Most,unfortunately, are simply inane, and are made by politicians attempting topush some constituent's emotional button (Jenkins, 199 ; Wanniski, 1989),or they are efforts to promote some other type of tax reform by challenginga reduction in the tax rate for capital-gains (Panetta, 199 ; Galbraith,1989). Houseof Representatives, 28 September 1989. The major controversy concerns whether or not to reduce the taxrate on capital-gains to some level below that for ordinary income, whichis the basis for the taxation of capital-gains under the Tax Reform Act(TRA) of 1986. H., and Rogers, D. Thegreatest flaw in the Administration proposal and in its defense of itsproposal is the dramatic two-year rate reduction followed by a laterincrease in the tax rate on capital-gains. Independent assessments ofthe Administration proposal indicate that this claim of increased budgetdeficits over the long-term is valid (Congressional Digest, 199 ).Administration claims to the contrary are based on the same type oferroneous and fallacious estimates and assumptions which characterizedReagan Administration economic proposals and projections--particularly inthat Administration's first term. 13, 15. (1989, July 25). ----. (1989, November 27). 24, 26, 28. E. Alternatively, try capital-gains cut that has a future. A24. Many ofthese arguments are thoughtful and deserve a fair hearing. The Wall Street Journal, p. Jenkins, E. House ofRepresentatives, 28 September 1989. B4. A. Floor debate in the U. A27. (199 , January). Congressional Digest, pp. A24. The Wall Street Journal, p.

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