Bush open to tax cut, he says

Republican leaders propose 2-year drop in capital gains rate

Expected to raise revenue

President says cuts going into effect may help economy enough

September 05, 2001|By Karen Hosler | Karen Hosler,SUN NATIONAL STAFF

WASHINGTON - President Bush signaled yesterday that he would be willing to accept a temporary cut in the tax on capital gains backed by Republican leaders as a way to boost the sluggish economy, though he stopped short of endorsing the idea.

Trent Lott, the Senate Republican leader, made a pitch for a capital gains reduction during a meeting with Bush at the White House. Lott proposed dropping the rate to 15 percent from the current 20 percent for two years to try to encourage business investment. House Speaker Dennis Hastert is expected to make a similar appeal at a session with the president today.

"I'm open-minded," Bush said before the meeting as the Senate returned from its August recess.

Republican leaders maintain that cutting the capital gains rate is an especially attractive way to stimulate the economy because such a cut typically generates more revenue than it loses in the first year or two. Investors, they say, tend to respond to cuts in the gains tax by selling stocks and other assets and taking profits quickly for fear that the rate will rise again.

"I think it would be helpful for our softening economy," Lott said of the proposal after his meeting with Bush.

Further, Lott said, "It would help with the revenue that we would have available to the government to spend for our top priorities - education and defense."

Bush suggested yesterday that a lower capital gains tax "would pile up some revenues."

Still, the president, under attack from Democrats who say he cut income taxes too deeply this year, especially for the wealthy, did not go so far as to embrace the Republican leaders' proposal. But he didn't reject it, either.

Bush said he wanted to see how well his $1.35 trillion income tax cut, which was enacted in May, can revive the economy.

"Only half of our rebate checks have gone out," the president said, referring to the checks of up to $300 for individuals and $600 for couples, representing a first-year installment of the tax cut. Bush noted that further reductions in marginal income tax rates will take effect in January.

"What I'd like us to do is take a look-see to make sure that the stimulus package that we now are implementing works," Bush told reporters.

Lott said he believed that Bush's concern was primarily a matter of timing. Democrats, who contend that Bush's tax cut combined with the stalled economy to consume the non-Social Security surplus that had been projected for this year, are less enthusiastic about further tax cuts.

Democrats have often asserted that a lower capital gains tax rate would mostly help affluent Americans with sizable investments, at the expense of the poor.

Tom Daschle, the Senate majority leader, who had his own private meeting with Bush yesterday, said he would not rule out a capital gains tax cut. But the South Dakota Democrat stressed that additional tax cuts could further shrink the dwindling federal surplus in the long term and should be offset by spending cuts.

Though a reduction in the capital gains tax tends to boost government revenue in the short term, Daschle noted history shows that in the long run, it reduces overall government revenue.

And even though Republicans are proposing only a temporary capital gains tax cut, Daschle said: "I have yet to see a tax cut that is only on the books for two years."

Daschle said he was heartened, though, by the tone of his meeting with Bush. He said the president "reassured me that it is not his desire" to use any of the surplus revenue in the Social Security trust fund to help relieve the budget squeeze facing Congress and the administration this fall.

"We feel very strongly that that ought not be an option," Daschle told reporters. "And I'm delighted to report that at least on a bipartisan basis at this level there is no desire, no willingness to tap into the Social Security trust fund."

Congress returned to Washington yesterday after a month-long recess during which updated projections revealed that the budget surplus that is separate from the Social Security system had all but vanished.

Daschle, along with Rep. Richard A. Gephardt, the House minority leader, and other Democratic lawmakers called on Bush last week to present them with a plan for meeting his spending priorities - particularly on defense and education - without dipping into the Social Security reserves.

The Senate Democratic leader said Bush assured him yesterday "that he intends to give us that leadership and that guidance. We'll have other times and other opportunities for us to get into more of the details."

Speaking to reporters before meeting with the lawmakers, Bush lashed out at what he called "scare tactics" by Democrats who have accused him of "raiding" the Social Security trust fund.

"We've got ample money to meet our priorities," Bush said. "Surely we can fit our desires and our appetites within those numbers without affecting the Social Security checks that go to the American people."

"I understand how politics works up here," the president added. "There's always that scare tactics, trying to tell the American people that the budget process is going to lead them to not get their Social Security check. That's just ridiculous."

The short-term revenue increases from capital gains tax cuts have long been a source of dispute among lawmakers. An analysis compiled by the staff of House Majority Leader Dick Armey indicated that the three cuts in the capital gains rate during the past three decades have produced short-term increases in revenue.

Most recently, the rate was cut in 1997, to 20 percent from 28 percent. But revenue from the capital gains tax rose from $66 billion in 1996 to $110 billion in 1999.

Conversely, an increase in the capital gains tax in 1986, to 28 percent from 20 percent, resulted in a reduction in revenue to $28 billion in 1990 from $30 billion before the cut took effect, the Armey analysis found.

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