Bush reportedly gives up hope for capital gains cut

October 07, 1990|By Stephen E. Nordlinger | Stephen E. Nordlinger,Washington Bureau of The Sun

WASHINGTON -- A cut in the capital gains tax, a cornerstone of President Bush's economic policies, is "off the table" for this term and any possible second term for Mr. Bush if the Democrats retain control of Congress, according to a high-level administration official.

Any new compromise deficit-reduction package, necessitated by the House's rejection Friday of the first one, will not include a capital gains cut, the official said.

Capital gains are the gains from appreciation of an asset such as a stock or a house.

The proposal was withdrawn in the final hours of the "budget summit" negotiations, when it encountered steadfast resistance from the Democratic negotiators.

"The votes are there in the House and Senate, but we can't get past the Democratic leaders," the official said. "The price is just too high."

Democratic congressional leaders, who contend that a capital gains rate cut would provide a bonanza for upper-income taxpayers, who get the lion's share of capital gains, have continued to insist that any cut must be accompanied by an increase in income tax rates for higher brackets.

"There is no likelihood of a capital gains cut without a rate adjustment," said House Speaker Thomas S. Foley, D-Wash. "It is just unacceptable to Congress."

But the administration is making it clear that keeping the current income rate system, a product of the landmark 1986 tax overhaul law, has become a higher priority than lowering the rate for capital gains.

Underscoring the impasse, Budget Director Richard G. Darman said that a concession toward raising tax rates even by one point would open the door and cause the top rate to escalate well above the current maximum of 33 percent.

"If we do that, we will be re-creating the old system and all the abuses that went with it," he said, referring to the plethora of tax shelters that existed before the 1986 tax reform bill.

The administration intends to continue to propose a cut in the capital gains rate as part of its annual budget, but the administration official said, "We're not going to press for it; it is just too tough."

The president has been championing a cut in the rate almost since he came into office, but he was forced by the Democrats to retreat last year and again in the summit negotiations. Backed by the business community, Mr. Bush has said that a cut from the current top rate was vital to spur investment and jobs.

To compensate partially for losing the capital gains issue, the administration insisted that the budget summit agreement include $7.3 billion in tax breaks to promote business investment.

But House Democrats want to eliminate these benefits from the final package.

Even if they survive in the final bill, David R. Burton, tax specialist at the U.S. Chamber of Commerce, said that the tax incentives would be "far less beneficial" in spurring investment than a cut in the capital gains rate. The revenue and tax policies incorporated in the summit agreement, however, are heading in a different direction, with a marked turn toward consumption taxes and a vast expansion of fees for use of government services -- moving the government toward functioning more like a private concern.

This new direction will remain part of any agreement for reducing the deficit, said the administration official in discussing the outlook for the package after the House vote that turned down the original agreement.

As part of the direct shift of the burden away from the taxpayer, the budget agreement would have moved $4.2 billion in costs for operating the mail service to the U.S. Postal Service. Officials of the agency said that such a shift could lead to an additional five-cent increase in postage rates by 1995.

"There is a real attempt in the package to reduce the burden on taxpayers and have users pay for the services, like in the private sector," said Eugene Steuerle, a former top Treasury tax official now at the Urban Institute.

Fees would be charged for federal anti-pollution fuel tests, the full cost of regulating the nuclear power industry, federal railroad inspections, use of the patent and trademark guarantee system, access to federal weather data, Coast Guard patrols of waterways used by recreational boats, export and import plant and animal health inspections and use by airlines and cruise ships of federal tourism promotions.

In addition to higher deposit premiums, higher payments would also be imposed for federally insured pension plans.

The move toward reviving revenue from consumption taxes, which has fallen in the last 30 years in relation to the economy, is reflected in the proposed higher taxes on gasoline, tobacco, alcoholic beverages and a new 10 percent tax on luxury purchases.

The consumption taxes would raise an estimated $74.1 billion over five years, and the fees for federal services would bring in a projected $10.7 billion in the same period.

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