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Plan penalizes long-term investors, rewards speculators, analysts say

Capital gains tax cuts on back burner in Congress

Ever since the capital gains tax rate was raised from 20% to 28% as part of the 1986 Tax Reform Act, when capital gains were treated as ordinary income, there’s been a movement to restructure it. And reform proponents are hopeful that the political logjam in Congress will finally be broken with the Bush administration and GOP control of the House and Senate, paving the way for more long-term, investment-friendly tax laws.

“The government should focus on rewarding long-term investors and penalizing speculators, and the obvious tool is the capital gains tax,” said Vanguard chairman and CEO John J. Brennan.

Stacey L. Wall, president of Pinnacle Trust in Ridgeland, agreed. “I would like to see new legislation regarding the capital gains tax — something along the lines of making gains on securities held for more than 10 years tax fee — instead of being taxed at up to 20%, as they are now,” Wall said. “I’d also like to see short-term gains taxed more heavily than they are now. Currently, a gain on an asset held less than a year is taxed at the ordinary income tax rate. I favor a stiffer tax for the speculator who buys stock and then sells it within 90 days — maybe a 25% premium over the current tax rate.”

Restructuring the capital gains tax is perhaps the single most controversial economic issue since the capital gains tax rate was raised.

According to a report by the American Council for Capital Formation (ACCF) Center for Policy Research, capital gains tax rates’ impact on entrepreneurship and venture capital is important because it rewards entrepreneurs and early stage investors for the risks they bear when starting a new venture in two ways: venture investments are critical to the economy since innovation and job creation come disproportionately from new startups and the private market will tend to under-invest.

The report said that because new company formation is inherently risky, with only one in three startups succeeding, the higher risk should be balanced with the hope of higher returns, but are discouraged with too high a capital gains tax rate. The risk would be offset by a lower capital gains tax rate.

An unidentified New Jersey painting contractor said that the capital gain tax cut “is the best thing that could happen to this country, because that’s when the work will come back.”

“People say capital gains are for the rich, but I’ve never been hired by a poor man,” he said.

“As our newly elected Congress debates tax policy, I hope that lawmakers will consider the long-term economic implications of capital formation and capital stability,” Wall said.

In September 1999, President Bill Clinton vetoed the Taxpayer Refund and Relief Act of 1999, which would have lowered the top rate to 18% and index gains for inflation in the future.

Bill Felder of Harper Rains Stokes & Knight, an accounting firm in Ridgeland, said it is his understanding that the Republican tax act has not called for any restructuring in the capital gains tax.

“However, for future changes, it is a popular Republican initiative to reduce the capital gains tax ceilings, which if reduced historically leads to increased tax collections — not decreased — due to more capital transactions,” Felder said.

And there’s some movement in Congress. H.R 15, to amend the IRS code of 1986 to provide a maximum tax rate on capital gains of 15% for individuals and 28% for corporations, was recently referred to a House committee.

“As with any tax policy discussion, the devil is in the details, but one thing is undeniable: our current system is not providing the right incentives,” Brennan said.

The controversial flat tax plan, which would be phased in over a three-year period, beginning at a 19% rate across the board and eventually locked in at a 17% rate, would completely eliminate the capital gains as a separate tax. But right now, all eyes are on the proposed income tax plan introduced Feb. 27 by President George W. Bush.

Whatever tax policy Congress enacts, professor Steve H. Nickles, a member of the newly created Internal Revenue Service Oversight Board, said the IRS “will always keep working to simplify taxation from the tax administration side.”

Contact MBJ contributing writer Lynne Wilbanks Jeter at lwjeter@yahoo.com or (601) 853-3967.

About Lynne W. Jeter

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