Masonry Magazine August 1997 Page. 17
WASHINGTON UPDATE
A Tax Policy for
Economic Growth...
and Balanced
Budgets
Written by U.S. Senator Jon Kyl (R-AZ)
for MCAA's Masonry Magazine
What made it possible for congressional leaders and the White House to bridge their differences and produce a budget agreement that allegedly leads to balance by the year 2002? The answer: a projected $225 billion surge of revenue from a strong and growing economy- an extra $45 billion in each of the next five years.
Of course, the negotiators did not reach balance by applying that revenue windfall to deficit reduction or tax relief, as you might expect. Most of it was used instead to accommodate higher levels of spending demanded by President Clinton and even some in Congress. In other words, balance would be achieved, but at a level of spending $45 billion higher per year than if all the additional revenue were applied to deficit reduction or tax relief alone. (The fact that the budget deal enlarges government is one reason why I voted against it.)
Still, the budget negotiators rightly identified a thriving economy as one of the keys to solving our nation's chronic deficit problem. And unlike previous budget agreements, they looked to economic growth to provide the additional revenue, avoiding the trap of tax increases, which limit the economy's potential and, in turn, make it harder to eliminate the red ink. They even found a way to provide a limited amount of tax relief.
But with the deal so dependent upon economic growth, and no significant changes in policy to prevent the already lengthy expansion from running its course within the next few years, many believe that it will be difficult, if not impossible, to ever realize the extra revenues that the budget agreement needs to bring the budget into balance.
Of course, the agreement itself provides no tax cuts no family tax credit, capital gains relief, death-tax relief, or education tax credit. It merely establishes the overall size of the tax cut that Congress will begin writing this summer. It permits a net tax cut of $85 billion over the next five yearsa minuscule amount considering that the Treasury will collect an estimated $8.6 trillion over that time period. And considering that even the modest tax-cut package congressional leaders proposed earlier this year a $500-per-child tax credit, a 50 percent cut in the capital-gains tax, estate-tax relief, and expanded Individual Retirement Accounts will cost an estimated $188 billion, it is doubtful that Congress will be able to provide meaningful relief in all of these areas. (That is another reason that I voted against the agreement).
Rather than spread tax relief so thin that it does no one much good, some of us are suggesting that we focus relief on just a few things that will do the most good for the economy overall - that is, on capital formation. After all, not one business can begin, not one company can expand, not one new job can be created, not one structure can be built without the capital to start.
The single best thing we could do in that regard would be to provide a deep reduction in the tax on capital gains. Ideally, the reduction should match that which was recommended by Democratic President John F. Kennedy as part of his economic growth plan in 1963-a 70 percent exclusion for gains earned by individuals, and an alternative tax rate of 22 percent for corporations. Ironically, Kennedy's plan, which I introduced this year as the Capital Gains Reform Act (S. 72), proposed even deeper capital-gains cuts than the Republican Congress passed a year-and-a-half ago.
Capital-gains reform will help employers and employees. The American Council for Capital Formation estimates that a Kennedy-ike plan would reduce the cost of capital by at least eight percent, leading to as many as 150,000 new jobs a year.
It will also help the Treasury. Between 1978 to 1985, the top marginal tax rate on capital gains was cut by almost 45 percent-from 35 percent to 20 percent-but total individual capital gains tax receipts nearly tripled from $9.1 billion to $26.5 billion annually. That may come as a surprise to some people, but the fact is that when tax rates are too high, people merely hold on to their assets to avoid the tax altogether. No sale, no tax. But that means less investment, fewer new businesses and new jobs, and-as historical records show-far less revenue to the Treasury than if capital-gains taxes were set at a lower level.
Research by experts at the National Bureau of Economic Research actually indicates that the maximizing capital-