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Of cabbages and kings.

Of Cabbage and Kings

The battle for the hearts and minds of the taxpaying public rages on up on Capitol Hill, and it seems appropriate for the tax community to take an inventory of the ammunition being used by all parties to the fracas. After all, it won't be long before we're caught in the cross-fire.

The rhetoric about tax policy and the budget deficit is reaching a crescendo as Congress struggles to meet its FY 91 budget timetable. The conventional wisdom here in Washington is that budget concerns will continue to drive tax policy for the forresseable future. No less luminaries than Ken Gideon, the Bush Administration's point man on tax policy, and Ron Pearlman, the chief of staff for Congress' Joint Committee on Taxation, both have repeatedly indicated so. Thus, it seems that any tax proposal should have to pass budgetary muster in order to even reach the President's desk. Nevertheless, the partisans inside the Beltway all have their own ideas about taxing and spending, and at times their relationship to budgetary concerns seems attenuated at best

One of the more important "hot" topics in town, and in America, is the restoration of preferential treatment for capital gains. Despite their best efforts to paint it otherwise, the Administration's pet project is a revenue-loser, at a time when we cannot afford to lose revenue.

To compound this problem, the opponents of a capital gains preference, with some success, have attempted to label the proposal a "tax cut for the rich." They point to statistics indicating that a tiny fraction of upper-end taxpayers will enjoy the overwhelming majority of tax savings from a capital gains differential. Thus, notwithstanding the fact that a majority in both houses of Congress support capital gains relief, the proposal still has some troubled waters to navigate before it becomes law.

This whole state of affairs seems to miss the point. Does a capital gains differential favor wealthier taxpayers? Of course it does; but, they're the ones with the capital assets. If Congress wants to stimulate economic activity, it has to go to where the money is. If the opponents of a rate cut don't like the underlying premise, they should attack capitalism, not capital gains. The equity argument is a classic red hearring.

The capital gains debate touches on important issues, and these issues deserve real answers, not partisan squabbles. The country faces serious financial challenges in the coming years. Budget deficits, interest rates, trade deficits--these matters can no longer be ignored by "fudging" budget numbers to satisfy Gramma-Rudman targets.

Washington is paralyzed by its current financial woes. In the face of sweeping changes in Eastern Europe, Congress and the Administration must sit by virtually idle because--let's be candid--we're broke. Washington's inability to come to terms with its financial situation has left the country with no money to give to emerging democracies. This is an alarming predicament; yet we occupy our time debating such weighty issues as the President's position on broccoli" The magnitude of the paralysis is apparent. One sees with increasing frequency media accounts of the eclipse of Washington's importance. For most Americans, this may be a welcome relief--domestically. But, in the international arena, the implications are profound. America's ability to retains its international competitiveness, as well as it's ability to effectively carry out its foreign policy objectives, may well be riding on the decisions made by this Congress.

In recent testimony before the Senate Finance Committee on (you guessed it) the revenue impact of capital gains, non-partisan economists made it clear that America needs to get its accounts in order. The issue isn't revenue impacts, they told a disinterested panel, but economic survival. America is virtually alone among Western countries in its treatment of capital gains. In order to bolster competitiveness, the cost of capital must be lowered. A capital gains preference achieves this.

Interestingly, at this same hearing, the economists were asked what is the single most important factor impeding lower interest rates. The answer was unanimous: the federal budget deficit.

Don'w we need to cut the deficit? Desperately. But why? Because it sounds good? We need to reduce the deficit for the same reason we need a capital gains differential--to make ourselves competitive in world markets. Far from being incompatible, the two goals can and should work in tandem to allow the country to assert its position in a global economy.

The bottom line: yes, capital gains will require hard choices. Unfortunately, Washington suffers from a paucity of Solomons.
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Title Annotation:budget deficit and capital gains tax
Author:Berkery, Peter M.
Publication:The National Public Accountant
Article Type:column
Date:May 1, 1990
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