The MacNeil/Lehrer Report; Capital Gains Tax

ROBERT MacNEIL: How can the United States stimulate more investment in new plants and create new jobs? A powerful movement in Congress says it`s simple: cut the tax on capital gains. Investors will find it more profitable to buy stocks, and companies will invest more in new plants. But the Carter administration says it doesn`t work that way. Cutting the capital gains tax would just be a windfall for the rich. Tonight: who gains from capital gains?

Good evening. Back when he was running for President, Jimmy Carter said our tax system was a disgrace because it was so unfair. One remedy he proposed was to tax unearned income, or capital gains, at something like the same rate as earned income, or wages. Capital gains are profits earned from selling things like stocks, bonds, land and other assets. The most familiar capital gain, perhaps, for most Americans is profit from the sale of a house. Such income has always been taxed more lightly than wages, and Mr. Carter wanted to even them up. But now a snowballing movement in Congress seems likely to make Mr. Carter reverse himself, or risk losing his whole tax reform package. Tonight, the battle over capital gains: who gains, who loses? Jim?

JIM LEHRER: Robin, capital gains used to be taxed at a maximum rate of twenty-five percent, and only those in the fifty percent or higher income tax bracket paid even that. This all changed in 1969, when Congress set a series of minimum tax provisions and other new taxing guidelines. The result was a near doubling of the rate on most capital gains, to a 49.1 percent maximum rate. And until recently the Carter administration and others were seeking to raise it even higher. But, as Robin said, the idea of rolling them back has now caught favor, largely as a result of the efforts of one man, Congressman William Steiger, Republican of Wisconsin. As one newspaper said recently, Steiger has "shaken the earth" with a proposal to decrease the rate again.

Congressman, what exactly does your amendment do to the capital gains tax rate?

Rep. WILLIAM STEIGER: Jim, essentially what the amendment does is simply undo everything that`s been done since 1969 -- take the rate from that 49.125 down to twenty-five percent; put it back as it was prior to 1969.

LEHRER: Why do you want this done?

STEIGER: Jim, the answer as to why is really a whole series of reasons: one, because it`s fairly clear that what was estimated, by Treasury originally and by the Congress when they began to raise the rate, hasn`t happened. The amount collected from capital gains has gone down, not up. Secondly, we have less being invested. Thirdly, we`ve had a falloff in the number of individual investors. More increase in institutional investors in the stock market because there`s no incentive. Fourth, you`ve seen high- technology, venture-capital companies declining, because there is no reason for anybody to invest when there is the risk at high taxation and that you won`t gain anything. So that there are in fact a whole series of reasoning, including one last one, I suppose, in a sense, that was reflected in a letter that came in from Hutchinson, Kansas; said "I`m very much interested in the support of your proposal, I`m seventy-five years old, I`ll have to sell my house. I live on a fixed income, and as a result of inflation what you`re going to do to me is clobber me. Please pass the Steiger amendment."

LEHRER: Is it your position that reducing the capital gains tax rate will offset all of those bad things that you`ve just enumerated that are happening now -- that it will increase capital formation; that it will thus induce more investment, both for business and on the part of individuals in the stock market, and so on? That is your position, is that right?

STEIGER: Jim, I think it`s fairly clear that, at least based on the studies that have been done -- and you have four studies at this point and then you`ve got the Lubick study in the Treasury Department, and he can talk about that -- every...

LEHRER: And he will in a moment.

STEIGER: Every one of those studies comes out saying that you will have increased economic activity, you`ll have more money being collected by the federal government, you`ll have a reduction in the rate. of unemployment, a reduction in inflation, and an increase in the gross national product. My judgment is that there is no question that what has happened since we began this process of in fact deterring people`s willingness to risk and invest has meant stagflation and has meant a slowdown in economic activity in the United States; so that for all of those reasons, yes, the answer is that as a result of lowering the burden on capital gains taxation, everyone in this country benefits and the United States will be better off.

LEHRER: Congressman, as you know, the number one criticism of the Steiger amendment is that it really only benefits people of high income, those who make more than $50,000 a year. How do you answer that?

STEIGER: Jim, I think it`s fairly clear that it is true, high income individuals can in fact benefit as a result. But that misses two fundamental points, as far as I`m concerned. One is that it isn`t just high-income individuals, it is people who are employees of Sears, Roebuck and invest in Sears stock as a part of their plan; it`s people who own homes; it`s people who have an interest in pension plans. As you`ve seen the stock market decline, as you`ve seen a decrease in employment opportunities, there are an awful lot of people at all income levels who in fact benefit as a result of increased economic activity. Another letter that came in just today, as a matter of fact: somebody who said, "I was left a trust in 1968, stocks only, I`m living on $4,000 a year. As long as the stock market stays in the condition that it`s in right now, I don`t get anything and I am also being hurt." That`s not a high-income individual, and that kind of person -- those who work, those who are productive, those who want to save, those who are willing to take a risk at all income levels -- will benefit as a result of lowering capital gains taxes.

LEHRER: All right. Thank you, Congressman. Robin?

MacNEIL: The Carter administration has resisted the Steiger plan, even though it also wants to increase incentives for investment and capital formation. One administration official who argues strongly against the rosy scenario of the Steiger forces is Donald Lubick, Assistant Secretary of the Treasury. Mr. Lubick, why does the administration oppose this?

DONALD LUBICK: Basically, Robin, there are two reasons. The amendment proposed by Congressman Steiger is an inefficient and a costly and an unfair way to promote capital formation. I think it is unfair because eighty percent of the benefits are directly channeled to persons whose incomes are $100,000 or over; it`s inefficient because it is giving a tax reduction of some $2.2 billion, a reduction which could be given in much more stimulative ways to finance new plant and equipment. The tax cut is going to go to timber inventory sellers, it`s going to go to distributions of coal royalties, iron ore royalties -- a mess of things that are classified as capital gains -- it`s going to go to real estate investors, it`s going to go to a lot of gains that represent not new investment but assets that are already held. The administration has proposed a much greater stimulus to capital formation through investment incentives for direct investment in plant, equipment and through lower corporate rates which will generate this type of investment. In short, we think it is not necessary to give two billion dollars to the extremely wealthy taxpayers in this country and have it trickle down to the rest of the economy.

MacNEIL: Mr. Lubick, your boss, Secretary Blumenthal, said in a recent speech in Florida, "We are underinvesting because it no longer pays enough to invest enough." Isn`t that just what Mr. Steiger is saying?

LUBICK: I think we are all agreed that if we reduce the tax on capital income we will stimulate investment; and I think it`s basically a question of what is the most efficient and fair way to spend $2.2 billion. And I think the evidence that the capital gains tax is the cause of the decline in the market is badly overstated and misstated. The economic studies that have been done have been based essentially on an assumption, and that is the assumption that it is the capital gains tax that is the direct cause of stock prices.

When we look at the studies we find that they are either based on an assumption of the ultimate conclusion they reach or else based upon equations which are very misleading. They contain factors and assumptions that the stock market would have risen in the absence of something else which didn`t happen. In point of fact, we`ve had serious inflation, we`ve had serious economic problems, we`ve had an energy crunch, we`ve had a crisis in the stock market for many reasons that have nothing to do with the level of capital taxation. And it is simply not necessary to give a $2.2 billion reduction -- of which, incidentally, only about twenty-five percent goes to investors in the stock market -- simply to produce this revitalization of the economy.

MacNEIL: Okay. That argument, which the administration makes is Mr. Carter, is the administration prepared to compromise on this, given the huge support that the Steiger plan appears to have, both in the Ways and Means Committee in the House and in the Senate, where it has sixty-one cosponsors -- given that huge support, is the administration prepared to compromise rather than risk losing the whole tax package, as some people have predicted?

LUBICK: Well, I don`t think we`re quite at that stage; I think there`s a lot of education to be done here and a lot of pointing out what the realities of the situation are. And in point of fact, you know, there`s been a lot of talk about a maximum rate of 49.1 percent; that is a theoretical and hypothetical rate. In point of fact, for 1975, for example, we discovered that there were only 484 taxpayers that ever got over forty percent rate. Now, I`m not suggesting what the appropriate rate ought to be, but to say that we are having a rate reduction from forty-nine percent to twenty-five percent is just not consonant with the facts.

MacNEIL: I see. Thank you. Jim?

LEHRER: One of the leaders of the lobbying effort in favor of the Steiger amendment, lowering the rate, is Charls Walker. Mr. Walker was a deputy secretary of the Treasury in the Nixon administration, now a major Washington lobbyist for business issues. He`s chairman of the American Council for Capital Formation, set up specifically to push for a capital gains tax reduction, among other things. Mr. Walker, you heard what Secretary Lubick says, that it`s not necessary to give a $2.2 billion reduction in taxes to whip the investment problem. Do you agree?

CHARLS WALKER: I don`t agree, in the sense that I see nothing but good coming out of a significant reduction in capital gains rate such as the enactment of the Steiger bill, and I think that to look at the revenue cost and say, "We reject it for that reason" -- so-called revenue cost, which I dispute -- is to throw out the baby with the bath water or cut off your nose to spite your face. I think that common sense tells us -- you can argue about equations and econometrics and all that jazz -- but common sense tells us in the first place that if you tax something less, it`ll be worth more; so stock prices are going to go up. They argue about how much: forty percent, ten percent, thirty percent -- that`s not the point; they`re going to go up.

Secondly, it`s agreed by economists of all stripes -- the final Ford economic report, the first Carter economic report -- that higher stock prices mean more productive investment, more business spending for new and more efficient plant and equipment; that`s what we call capital formation, there`s no argument on that. And there`s no argument at all that Mr. Carter and Mr. Blumenthal are big supporters of more capital formation, because more capital formation is the secret of more jobs -- $30, $40, $50,000 investment for a job in industry; control inflation by producing more, that`s the way to get the rate of inflation down; more competition in world markets, we`re more efficient, to reduce the balance of payments deficit; and more economic growth so we`ll have a bigger economic pie. And part of that economic pie means higher incomes that are taxable to the Treasury.

So I dispute this $2.2 billion vigorously. I believe, as the econometric studies have concluded, that passage of the Steiger amendment would increase revenues to the Treasury for two reasons: immediately, thousands and thousand of investors who are locked in, have large capital gains and don`t want to pay taxes up to forty, fifty, sixty percent, including state taxes, when they sell their stocks, are going to liquidate their stocks and the greater volume of liquidations will give you more revenue to the Treasury, compounded with the economic growth that you get out of it. So I think it`s great legislation.

LEHRER: How do you explain why a lot of people have suddenly decided it is a great piece of legislation, which was not the feeling a few months ago? What`s happened, politically?

WALKER: You can say that again. I think Mr. Steiger would agree with me that when he introduced the bill I said, "Well, that`s nice;" and a couple of guys went on it and, "Well, that`s nice, sure." And when the smoke cleared he had twenty-three votes in .a thirty-seven-member committee, I think a hundred cosponsors on the House floor now, and Mr. Hansen has some sixty-two sponsors in the Senate. Well, it`s a long story and it`s tied in with something like the Proposition 13 thing. I`d like to ask Mr. Steiger to give a subtitle to this bill and call it Proposition 13A, or something like that. It`s tied in with the taxpayers` revolt, it`s tied in with the whole venture-capital problem. We represent the minority banks in Washington; I talked to one of the leaders in minor

ity banks today, I said, "Have you heard about this?" He said, "A little bit.-- tell me about it," and he said, "That`s great, that`s wonderful." He said, "Black enterprise is not able to grow; we`re not able to go into business because we can`t get the venture capital because the venture capitalists can`t get the bang for the buck from the capital gains rates like we had before 1969. There`s just nothing now; there`s too much risk." And this and a general feeling -- and I think this is where people make a mistake; I think the President`s made a mistake -- there`s a general feeling around that the American people don`t like to see people make money and get reward for risk. I think the American people are entirely different. I think what the typical American wants is to make it big himself; and he knows he`s going to sell a home sometime, and he doesn`t want to get clobbered in the process.

LEHRER: Thank you. Robin?

MacNEIL: The Steiger plan is also vigorously opposed by one tax reform group out of government, Ralph Nader`s Tax Reform Organization. It`s Director is Robert Brandon. Mr. Brandon, why do you think the proposal to halve capital gains tax is a bad one?

ROBERT BRANDON: Well, let me explain what the proposal really is. It`s not a proposal to halve capital gains; it`s a proposal to repeal the minimum tax on income that is sheltered from taxation. There were over 230 people in 1975 that made over $200,000 a year -- in fact, averaged $400,000 a year -- and paid not one dime in federal income tax. The reason? Because they were able to put eighty-five percent of their income structured as capital gains. If the Steiger amendment passes, there will be another 110 people in that category who will receive a $77,000 tax break and become non-taxpayers as well. In fact, two thirds of the benefits of the proposal go to 20,000 families, about $60,000 apiece, the 20,000 richest families in the country, compared to the ninety-nine percent of the rest of us that will receive less than a dollar each. In fact, 3,000 people who make over a million dollars a year will get a tax break of about $214,000. The argument that this is somehow a Proposition 13 response I think just belies the facts, because it`s the middle class that are tired of being overtaxed, and the reason they`re being overtaxed is because some people are not paying their fair share. Dr. Walker himself, who proposed a minimum tax for the Nixon administration in 1969, argued the importance of a minimum tax to make sure that everybody pays a fair share of taxation. And the scare tactics about over taxation of homes, I think, is unfortunate. The seventy-five-year-old man who`s going to sell his home doesn`t pay capital gains on that home under present law. And in fact, it`s the homeowner that`s going to get wiped out under this while the rich get rich, because I call this the real estate speculation tax, since only a third of it goes to capital gains; most of it goes to people who speculate in large property holdings, raising the value of property and making property taxes go up.

MacNEIL: Can I ask you this: last summer the Roper Organization was employed by H&R Block to do a survey, and one of the findings was that a majority of Americans were in favor, whether they`d benefit themselves or not, of lower capital gains tax. I just wonder how that poll finding squares with your argument about the unfairness of this.

BRANDON: Well, the Roper poll itself, which I looked at in quite a bit of detail, I think reflects the concern and the misconcern that people somehow are taxed simply on capital gains on their homes. Most people, when they sell their homes, buy another home or retire, and they essentially are exempt from a good deal of the gain. The burden on capital gains right now is already very low. It`s about nineteen percent on those people that make over $200,000 a year, not the forty-nine percent -- that`s a mythical high theoretical proposal. If the Steiger proposal goes through, the nineteen percent drops down to twelve percent. I don`t think those are the people that the American public have in mind that need tax relief at this time.

MacNEIL: Mr. Brandon, your organization, I`m sure, has been watching this very closely on the Hill. Do you have any anxiety that the Carter administration, which shares your view of it, is about to compromise on this?

BRANDON: No, I don`t think so, and I think that, as Assistant Secretary Lubick mentioned, once people begin to understand the full import of this amendment -- the fact that this amendment is being carried and pushed in the Congress; Congressman Steiger may have put it in early on without much expectation, but the special interest groups have jumped all over it. Five of the largest timber companies in the country are going to gain about seven million dollars each from this proposal. As I said, the high-income investors gain the most. And the studies that Dr. Walker points to are all financed by those very interests that are going to benefit. The leading study that Dr. Walker cites was paid for by his own Council on Capital Formation, and it`s very difficult to see the correlation between a reduction of about two billion dollars in capital gains with a $400 billion increase in the economy. When in fact capital gains were raised in 1970 and phased in over the next three years, the market went up. When capital gains leveled off the market dropped way down because of the oil embargo and inflation and so on.

The point is that this cutting taxes on the extremely wealthy 25,000 families in the country is not what`s going to stimulate the economy; we should be cutting taxes for the working middle class, who will spend more money and stimulate the economy that way. This is only trickledown economics in the extreme.

MacNEIL: Congressman Steiger, let`s go back to you. A lot of objections to your plan here. First of all, they say that the predictions that this is really going to stimulate, for instance, the stock market are just not right. How do you argue against that? How do you prove that you are right?

STEIGER: Robin, even if I were willing to say -- which, frankly, I`m not at this point, particularly given Bob Brandon`s interesting kind of approach to the whole thing; he`d just as soon tax everybody: all income belongs to government, and then let government decide how to spend it. I don`t think that`s what the American people are looking for, and I think it`s wrong, in terms of how this system of government operates. Beyond that the facts situation, Robin, are such that what you have to look at when you deal with the issue is, one, the $2.2 billion revenue loss that Secretary Lubick talks about and that Bob Brandon agrees with, is based on a static assumption; that is, that if you change tax rates nobody does anything differently. That`s nonsensical. It`s been proven to be nonsensical; it was proven in 1969 when we raised the rate, and that announcement was July 25, it wasn`t 1970. Everybody knew on the 25th of July 1969 that the rate was raised by the Ways and Means Committee. So that I think it`s fairly clear that people do change behavior; that they will in fact take some risks that they`re now not taking, if for no other reason than the six million individual investors who have withdrawn from the market who will, in my judgment, come back into the market when the rate is down and when there is some kind of reasonable return.

MacNEIL: Let`s ask Dr. Walker, who`s on your side in this: Dr. Walker, what about the argument that only about a third of capital gains is derived from the sales of stock and two thirds of the benefit from this would go to cattle people, timber people, and the Secretary mentioned coal, and real estate speculating interests, and that only a marginal part of the benefit would be to the stock market, which is the basis of your argument?

WALKER: Well, one third is far from marginal; it`s very important. But I don`t have a thing against the cattle people; I`d like to see the cattle people invest the dickens of a lot more money to produce a lot more cows and grow them up and get them up here and get beef prices down. I don`t have a thing against the timber industry; I`m worried about the skyrocketing price of housing, the skyrocketing price of lumber. I`d like to see the timber companies being encouraged to invest the dickens of a lot more into timber production to get wood for housing and what have you. We get to looking at something out here and say, "Oh, my goodness gracious, somebody`s going to make a buck out of this, and therefore we`ve got to slap him down." If in the process of making a buck he brings down the price of beef, brings down the price of a house, creates jobs, da-da, da-da, da- da -- boy, let`s go!

MacNEIL: (Laughing.) Okay. Jim?

LEHRER: Let`s go to you, Secretary Lubick. Just in the politics of it -- you`ve heard the arguments, and Mr. Walker said earlier on the question I asked him that this this has suddenly taken off. First of all, are you surprised, you in the administration, that it`s taken off; and you have a political problem right now, what are you going to do about it?

LUBICK: Well, we are surprised. We always knew that Congressman Steiger is one of the brightest members of the House and that not only his intellectual but his political perception is very good; but we were quite surprised at this, and we think to a great extent that there is a lot of misinformation and a lot of faulty assumptions that are going on here. Basically, I think, we get back to the idea that we are not against capital formation, we are in favor of capital formation. We are in favor of encouraging it in an efficient way; we want to simulate investment in plant and equipment, and we have made proposals that will do so.

LEHRER: Let me ask you this, though, just to be right out front with it: coming as it does after Proposition 13 in California, are you in a tough position now to be advocating raising a tax when the whole thing is to lower a tax? Is that the real problem that you have, from a PR standpoint?

LUBICK: I don`t think so. I think overall we are proposing a tax cut. I think the Carter administration was out in front of Proposition 13 by proposing a net tax reduction of some $25 billion in a way which would make the entire system fairer and more efficient. As a matter of fact, the President set very early on his goal to keep the share of the gross national product that is going into the tax system and cycled through the government, down and to bring it back to historical ratios. It`s crept up because of inflation.

LEHRER: Well, I mean on this specific issue.

LUBICK: On this specific issue, we had a proposal which would have meant some slight increase for those in the highest brackets, but overall we were proposing a very significant net reduction and a stimulus to business, but through an overall reduction in taxation on income from capital. I think that`s what you have to look at, what is the rate of tax on income from capital?

LEHRER: Congressman Steiger, are you willing to compromise on your twenty- five percent proposal?

STEIGER: That`s the age-old question. Actually, I was hoping you would ask Bob Brandon as to whether or not he concurred with the Carter administration`s recommendations for the investment tax credit, for example, as the way to stimulate...

LEHRER: I`ll ask him that on the next show.

STEIGER: As a practical matter, Jim, we`re faced with a situation at the present time in which there is a proposal by Congressman Jones of Oklahoma...

LEHRER: Thirty-five percent.

STEIGER: Thirty-five percent -- take it out of the minimum tax as a preference item. I would be prepared to accept that as a way to try and get the chairman of the committee...

LEHRER: Stop right there. Would you accept that, Secretary Lubick?

LUBICK: I think at this stage that the President is standing by his program as the soundest way to get things going.

WALKER: I think it`s important to note that that`s an acceptable approach if at the same time you get the cuts in the corporate rate and the investment credit liberalization that`s all part of an overall balanced package, wouldn`t you say that, Mr. Steiger?

STEIGER: It has to be a part of a balanced package.

BRANDON: Let me say, Jim, that the idea of cutting capital gains on the wealthiest two-tenths of one percent in the country is like saying the voters of California voted for a Proposition 13 that exempted millionaire estates from the property tax and left everybody else alone.

LEHRER: We`ve got to go. Robin?

MacNEIL: Yeah; thank you all, gentlemen, very much. We`ll watch to see what happens. Good night, Jim.

LEHRER: Good night, Robin.

MacNEIL: That`s all for tonight. We`ll be back tomorrow night. I`m Robert MacNeil. Good night.