Bipartisan Caucus of Lawmakers Tout Zero Capital Gains Tax

By Christine Hall | July 7, 2008 | 8:20 PM EDT

( - Eliminating the federal capital gains tax would be good for the economy and wouldn't make much of a dent in the flow of tax dollars to Washington, says a new congressional caucus.

The caucus convened to promote the elimination, or at least a rollback, of the tax, which now stands at 20 percent.
"Capital gains tax reform is one of the most effective things Congress can do to boost the economy," said Sen. Richard C. Shelby (R-Ala.).

According to the Congressional Budget Office, capital gains receipts account for approximately three percent of total federal revenue. "I believe that the economic benefits of eliminating the capital gains taxes would offset any loss in federal revenue," said Shelby. "Even a reduction in the capital gains rates would have a positive effect on our economy."

The co-chairs of the bipartisan Zero Capital Gains Tax Caucus are Senators Shelby and Zell Miller (D-Ga.), along with House Members David Dreier (R-Calif.) and Ralph Hall (D-Texas). More than twenty other House and Senate members have joined the caucus in recent months.

Miller, a former governor and a friend of former President Bill Clinton, has publicly criticized his party's leadership for, among other things, suggesting that the Bush tax cut contributed to the recession.

"We are in a slump because venture capital fell 74 percent the past year," Miller reportedly told the Georgia Chamber of Commerce in January.

Other Democrats, like Rep. Charles Rangel (D-N.Y.), the ranking Democrat on the House Ways and Means committee, have blasted the idea of cutting the capital gains tax, calling it a tax break for the rich.

Critics have also said that while a capital gains rate reduction may swell federal coffers in the short run, as investors sell stocks to take advantage of the lower rates, cutting the tax would cause revenue losses in the long run and would not boost the economy.

Such a policy could even "exert upward pressure" on long-term interest rates, according to the Center on Budget and Policy Priorities.

Supply-side economists like Stephen J. Entin of the Institute for Research on the Economics of Taxation have long urged a cut in the capital gains tax as part of a comprehensive overhaul of the tax system to eliminate double-taxation and penalties against saving.

Economist Martin Feldstein has estimated that cutting the tax on capital gains to 10 or 12 percent would be ideal, said Entin. But, Entin added, that doesn't take into account economic gains from lower tax on capital formation, higher employment and an increase in payroll and personal income tax revenue, as well as a better-performing stock market and more tax dollars from the corporate income tax.

"I don't know if the economic growth effect would completely eliminate the revenue loss," Entin conceded, "but [it] would certainly go a long way toward it."

A Republican-led effort to include in the president's tax cut bill a temporary reduction in the capital gains rate from 20 to 15 percent failed last year.

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