About-Face on Capital Gains

Rarely has the political climate changed so totally so fast on an economic issue. Only last fall, all the talk about taxes on capital gains--profits on the sale of assets such as stock, bonds and real estate--centered on prospects for a drastic increase. The Carter Administration drafted a proposal to tax all capital gains at full ordinary-income rates --which would effectively double the tax in many cases--but eventually sent Congress a recommendation for a much smaller rise. That still worried Representative William Steiger, 40, a baby-faced Wisconsin Republican who has the gung-ho style of a JayCee president. Therefore, on April 13 he introduced a counterproposal: an amendment to lower capital-gains taxes, indeed to cut them almost in half on the biggest profits. Steiger intended only a blocking maneuver, but he has found himself leading a marching band.

The proposal has picked up 61 sponsors in the Senate and won a majority of Steiger's colleagues on the House Ways and Means Committee, which originates all tax legislation. Because of Bill Steiger, the Administration reluctantly concedes, it will have to accept some lowering of capital-gains taxes to get any kind of tax bill out of Congress this year. Says Steiger: "I am more amazed than anyone."

His amendment would undo almost a decade of egalitarian tax reform. The basic rule on capital gains has long been, and still is, that only half of them are subject to income tax; until 1969, the maximum tax on capital gains was 25%. But beginning in 1970, liberals who considered that tax rate to be an undue favor to the rich raised the maximum tax on the biggest capital gams reaped by individuals to 49.1%,* by far the highest rate in the industrial world; the top rate on corporate capital gains is 30%. Steiger would set the clock back to 1969--and a 25% maximum tax for individuals and companies.

That seems an unlikely proposal to fire the passion of tax rebels, since four-fifths of the benefits would go to people with incomes of $100,000 a year or more. But Steiger and his allies insist that the U.S. economy is being held back by a low rate of investment.

Cash heavy investors are reluctant to sink money into risky new ventures unless they can foresee lightly taxed profits. Frank Press, director of President Carter's Office of Science and Technology Policy, has found that more than 300 high-technology companies were started hi 1968, when capital-gains taxes were low. In 1976, the last year for which figures are available, there were none whatsoever.

In order to promote more investment that would help everybody, Steiger and his allies argue, taxes must be cut for the people who have money to put to work. Michael K. Evans, president of Chase Econometrics, figures that if Steiger's amendment passes, stock prices would jump 40% in two years. One reason: investors would pull money out of bank savings, municipal bonds and mattresses to pursue capital gains in the stock market. As prices rose, Evans continues, companies would be able to finance a huge expansion of plant and equipment spending by selling new stock. The payoff: a speedup in economic growth that would create 440,000 new jobs by 1985. The Steiger amendment itself, Evans calculates, would not cost the Treasury a cent; though the capital-gains levy would be lower, there would be more profits to tax. And the quickening of economic growth would raise the Government's take from other taxes enough to cut the federal deficit by $16 billion in 1985.

Administration officials assert that these glowing predictions rest on unprovable assumptions. Treasury Secretary W. Michael Blumenthal claims that the Steiger amendment would cost the Government $2.2 billion in revenue a year. He and other critics insist that there are more effective ways to stimulate investment: reducing the tax on corporate profits, increasing the tax credit that companies get on spending for new plant and equipment, and easing the tax on dividends.

The main argument against Steiger is ideological: cutting levies so much for the rich would strike a blow at the whole principle of progressive taxation. The Treasury figures that the Steiger amendment would reduce taxes an average of $14,000 for people with incomes of $200,000 a year or more--and exactly 26-c- for people who earn from $15,000 to $20,000 and rarely get a chance for large capital gains.

A compromise appears likely. The Administration has given up trying to beat Steiger, and is instead seeking to keep shallow any cut in capital-gains taxes. The hottest prospect is a reduction in the maximum rate to 35%. Meanwhile, the whole episode has shown politicians once again how deeply Americans have come to resent taxes. Says Richard Rahn, executive director of the American Council for Capital Formation, a lobbying group for lowering capital-gains rates: "Support for Steiger is coming not from the fat cats but from middle-income people yelling 'I want a chance to make it!' The fat cat can protect his income. But the middle-income guy who still dreams of some day making it wants to know he can do it big." Whether those dreams are realistic or not, Bill Steiger has discovered in them a political wish fulfillment.

*Half the gain is taxed at ordinary-income rates, which go up to 70%, equivalent to a 35% tax on the capital gain. The other half is subject to some special taxes, including the minimum levy imposed on people who have incomes of $10,000 a year or more from tax-sheltered sources. These levies raise the effective maximum rate to 49.125%.

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