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Finance Committee Compares Benefits of Capital Gains Rate Cut and Indexing

Tuesday, March 13, 1997

Deloitte & Touche OnLine

Witnesses at a Senate Finance Committee hearing March 13 focused on the question of whether a greater economic benefit would be generated by a capital gains rate cut or by indexing the basis of capital gains.

Senate Finance Committee Chairman William Roth, R-Del., asked former Housing and Urban Development Secretary Jack Kemp and former Federal Reserve Board Chairman Paul Volker how the two proposals would affect the nation’s savings rate.

Volker said the best way to increase savings would be to eliminate the federal budget deficit. Kemp said the gains rate should be eliminated, and, if that is not possible, the rate should be reduced and investors should be able to adjust the basis for inflation.

An alternative to changing the tax treatment of capital gains would be to allow for tax-free rollovers from one investment to another, Roth said. Such a proposal would not increase savings, witnesses said, assessing Roth’s suggestion.

Tax committee chairs oppose delaying cuts

Roth and House Ways and Means Committee Chairman Bill Archer, R-Texas, objected to House Majority Whip Tom DeLay’s, R-Texas, suggestion that tax cuts be put off so the budget could be balanced sooner.

"Read my lips, no delay" in cutting taxes, Roth said during his opening remarks at the hearing. Archer also indicated separately he would not support delaying tax increases to balance the federal budget more quickly.

As reported yesterday, DeLay in a Washington Times story said balancing the budget should be given greater priority than cutting taxes.

Ethanol Tax Credit Under Fire: The tax credit encouraging ethanol fuel production has not dramatically increased the nation’s energy security, or cleaned its air, but has cost $7.1 billion since 1979, the General Accounting Office said March 13, in a report released by Archer.

"The subsidy has failed to achieve its desired environmental or energy-related intentions," Archer said. If left in place the credit will cost taxpayers an additional $2.4 billion through the year 2000, the report said.

Eliminating the tax credit would create "a whale of an offset," House Ways and Means Committee member Philip English, R-Pa., said at a press conference. Congress and the President must pass some combination of tax increases or spending cuts to offset any revenue loss from a tax cut.

Staff Level Budget Talks Progressing Slowly: Discussions among congressional and administration staffs about balancing the budget progressed slowly, and recent events have further dampened prospects, congressional and administration sources said March 13.

"People are beginning to try to shape the outcome of deliberations on the budget," White House spokesman Mike McCurry said, confirming that the tax task force budget negotiations have begun.

The talks probably are "going to drag out" because the GOP keeps placing obstacles in the place of progress, Senate Minority Leader Tom Daschle, D-S.D., told reporters. "Yesterday it was CBO; today it’s the CPI," said Daschle.

Daschle reacted to criticism from Senate Majority Leader Trent Lott, R-Miss., criticism of President Clinton’s decision not to support creating a panel to overhaul the Consumer Price Index. "It’s now clear the President lacks the courage to step up to the CPI issue, or any other budget issue," Lott said. A Senate Finance Committee commission and others have said the CPI overstates inflation, which compounds the budget deficit.

The minority leader also responded to the Congressional Budget Office’s scoring of the Clinton budget. CBO estimates the Clinton plan will produce a $69 billion deficit in 2002 instead of a balanced budget.

The House, highlighting its dissatisfaction with the budget, March 13 approved 231 to 197 a non-binding resolution calling upon President Clinton to send Congress a new budget that is balanced according to CBO scoring rules.