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A Better Way on Capital Gains

THOSE opposed to cutting the tax on capital gains often argue that this would primarily benefit the rich. They are mostly right. True, some homeowners might get a tax break should they sell a house and not reinvest the funds in a more expensive dwelling. But the biggest winners would be investors in stock, business real estate, and timber. Such assets tends to be concentrated among the wealthy. Those in favor of the cut charge opponents with letting envy of the wealthy block a tax change which would stimulate savings and investment and create new jobs.

Our criticism is based rather on the fact that they make little economic sense. Business economists, after cranking up a computer, may claim that their econometric studies prove that a cut would encourage people to consume less and save more. But we're skeptical. Too often econometricians hired by either side of a tax argument can come up with studies offering ``proof'' of their positions - pro or con. The economy is highly complex. Many factors enter investment decisions, with taxes only one element.

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The proposal authored by Rep. Edgar Jenkins (D) of Georgia is particularly lacking. It would cut the capital gains rate from 28 percent (sometimes 33 percent) to just under 20 percent, but only for the next 30 months, then raise it back to 25 percent, with the gains indexed for inflation.

This would encourage investors to take their capitals gains in that short period, escaping billions of dollars in taxes. It might add several billion to government revenues over the short term. But that revenue could be lost in later years. It is hard to determine whether the government would gain or lose in the long run.

Some critics speculate the Jenkins tax plan, if implemented, could kick off a damaging rush to sell stocks and real estate. Whether that's the case or not, such a short-lived tax goody, though a retroactive financial blessing to those who have seen their assets appreciate in value over time, wouldn't do much to encourage long-term investment.

If more revenue is the game, why not tax capital gains at death? When heirs take over inherited wealth, they are not taxed on the accumulated capital gains on these assets. That's one of the biggest remaining loopholes in the whole tax system and one that probably discourages the best use of capital.

Besides, capital gains already have another tax preference over ordinary income. Capital gains are not taxed in the year they occur; only when realized on the sale of an asset.

Herbert Stein, who chaired the Council of Economic Advisers under President Nixon, says further tax breaks for capital gains would be ``unfair'' and that the tax system should not be changed ``unless there is a clear and strong reason for the change.'' We agree.

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