In this day of limited resources when every dollar has to count, before we cut the capital gains rate we must ask whether it will work, can we afford it, and will it be fair.
Based on past history, I doubt it will improve the economy. I remain convinced that without other changes in the tax code, there is a strong chance of it increasing the deficit over the long run.Finally, I am completely convinced that the greatest proportion of the benefits will go to the well-off.
With the costs so high and the odds of a positive economic impact so low and the distribution of the benefits so unequal, it seems to me a capital gains cut is not a good option.
To have a positive impact on the economy, a capital gains cut will have to increase savings and investment. Economists do not agree that a capital gains tax cut can have a significant enough impact on an economy as large as ours. In fact, past cuts in the capital gains rate did not increase investment.
On the other hand, subsequent to the Tax Reform Act of 1986 when the rates on ordinary income were reduced and the rate on capital gains was increased to the level of the ordinary income rate, investment increased by much larger increments. Factors like interest rates, productivity, innovation and the rate of inflation have a greater impact.
There is no doubt that when the rate on capital gains is lowered there will be an immediate increase in tax revenues because so many who have held their assets will take advantage of the new lower rates. The debate is what happens over the long run.
Here, again, economists differ. There is a considerable school that holds that, after the initial flurry of asset sales, the level of transactions will return to about the previous level. But, if the tax rate has been reduced, then revenues will go down and in a few years there will be a considerable impact on the deficit.
The non-partisan Joint Committee on Taxation has estimated that over 10 years, the Republican proposal to cut capital gains rates in half will result in a revenue loss of $119 billion. Investment and the economy will have to improve by an extraordinary amount to make up for that impact on the deficit.
Finally, the distribution of the benefits of a capital gains cut gives me pause. When all is said and done, the lion's share of the benefits will, over time, go to the well-off. In any given year the number of middle class claiming a capital gains cut will be greater than the number of those with the highest 10 percent of incomes. But, each year, most middle class will either recognize only a small amount of gain or a one time large gain because of a sale of business, home or one-time stock option cash out. Year in and year out, the same well off will be cashing in considerable gains.
In the past decade we have seen the nation's wealth increase, but we have seen most of it go to those in the highest income strata. Wages as a proportion of total corporate income are at the lowest level in 30 years.
I do not see why we should skew the playing field any more for those who already have been blessed while we have so many among us who are in need and who are working hard to make ends meet.