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	Capital Gains Tax Reduction Clint's Window by Clint Stretch, Director, Tax Legislative Affairs, Deloitte & Touche LLP Monday, May 13, 1996

Don't Bet the House on It

I get a lot of questions these days about what's happening with the Republicans' promised capital gains tax cut.

For a while last year, some type of capital gains cut looked inevitable. Republicans made it a top priority, President Clinton agreed half-heartedly. The only argument left was over the size and scope of the cut.

Everything changed, though, when Congress and the White House failed to reach a long-term budget agreement. The Republicans in Congress passed the Balanced Budget Act of 1995, which included a capital gains tax cut, but President Clinton in December vetoed it largely on other grounds.

The capital gains tax cut has been left dangling in the wind. At the beginning of January, many tax advisors thought there was still a good enough chance of a retroactive capital gains tax cut that they advised clients to hold off filing their tax returns.

As we get further and further into 1996, it looks doubtful that any tax bill will pass that is large enough to include a capital gains cut.

Still, sporadic negotiations between the Republicans in Congress and the White House continue. It is an election year, and it is not unusual for Congress to consider a deficit reduction bill or other bill with tax provisions before an election. Also, House Ways and Means Committee Chairman Bill Archer, R-Texas, has said he plans to take action on a fiscal 1997 budget reconciliation bill this summer that includes some, if not all, of the tax provisions from the vetoed Balanced Budget Act of 1995.

Another factor: Although the on-again, off-again budget negotiations now seem unlikely to be productive, Clinton has been needling the GOP lately to come back to the bargaining table. Considering Dole's presidential ambitions, this lure may be irresistible.

Clinton and Dole might cut a budget deal to help both their election chances. There is a better chance noncontroversial items will pass. The bill would probably not include such controversial items as the school voucher program or extensive Medicare and welfare reform, but it may provide a capital gains cut. It probably would extend popular expired provisions, like the deduction for employer-paid tuition and the research and experimentation credit.

My prediction about the chances of any capital gains tax cut: No more than 50-50, probably less.

What sort of capital gains cut? The capital gains tax depends on your income tax bracket. If you are in the top income tax bracket, 40 percent, any capital gains you might have are taxed at a top rate of 28 percent. The Republicans want to change the capital gains tax rate to a 50 percent exclusion, which means your capital gains would be taxed at 50 percent of your regular income tax bracket. That means someone in the 40 percent income tax bracket would pay a tax of about 19 percent on any capital gains if the Republicans get their way.

Any effort to press for a capital gains tax rate cut will be aimed at individuals, I believe. I see no political push to present a capital gains tax cut that helps corporations.