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CBO Says Cutting Tax Rate Would Worsen Deficit

March 11, 1988

WASHINGTON (AP) _ The Congressional Budget Office said Friday that cutting the tax rate on capital gains, which President Reagan and some other conservatives advocate as a deficit-reduction measure, likely would worsen the deficit.

Most evidence indicates ″that lowering the top rate on long-term capital gains to 15 percent would result in a net revenue loss,″ the non-partisan CBO staff said in a report to Rep. William H. Gray III, D-Pa., chairman of the House Budget Committee. That loss was estimated to range from $3.9 billion to $7.8 billion a year, depending on other assumptions.

However, the report acknowledged that such studies cannot be precise. There are so many uncertainties, it said, ″that one cannot reject the possibility that a 15-percent rate might increase revenues.... That latter possibility, however, is unlikely.″

As part of the massive revision of federal income taxes in 1986, Congress raised the maximum tax rate on long-term capital gains - profits from stock, real estate and other assets owned more than six months - from 20 percent to 33 percent. That occurred because the new law wiped out preferential treatment of such gains and taxed them at the same rate as wages and other income.

In a written message to Congress on Jan. 25, Reagan said, ″The most important piece of unfinished (tax) business is to reduce the capital-gains tax rate to the level that will generate the savings and investment necessary for future economic growth. Past experience demonstrates that lowering the capital-gains tax rate will mean increased realizations of capital gains upon which taxes are paid.

″Reducing the capital-gains tax rate to an agreed-upon optimum should be a cornerstone of tax reform for the 1990s,″ Reagan wrote.

The president did not say how deeply the rate should be cut, but the level mentioned most often by congressional advocates of a reduction is 15 percent.

There is considerable support in Congress for reducing the maximum capital- gains rate. Advocates say this not only would raise revenue - by encouraging the sale of long-held assets - but also would encourage new investment.

Opponents, noting that eliminating the capital-gains benefit was a major factor in getting the 1986 tax law enacted, contend that restoring it would threaten that entire package.

Most benefits of a capital-gains reduction would go to the wealthiest Americans. The Internal Revenue Service estimates that taxpayers with incomes of $100,000 or more account for 55 percent of all capital gains but only 9 percent of other income.

CBO concluded that any increase in capital-gains realizations - the sale of assets - was not likely to generate enough revenue to offset a cut in the tax rate.

In addition, the study said, restoring preferential treatment to capital gains might reduce other forms of taxable income, such as interest and dividends, because investments that created capital gains would be made more attractive than other types.

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