The GOP's Multi-Decade Capital Gains Tax Cut Scheme

January 09, 2012 3:31 pm ET — Jamison Foser

Newt Gingrich

A recent report by the Congressional Research Service provided very good news for Republicans like Rick Santorum who support increasing income inequality: Capital gains and dividends — and the tax code's preferential treatment of these profits — have helped widen the gap between the wealthy and the rest of the country. That finding is in stark contrast to the arguments conservatives made in favor of capital gains tax cuts in the 1990s, and coupled with the fact that conservatives still advocate low capital gains taxes despite these results, it suggests that a tax code favoring the wealthy was the goal all along. 

According to the report, between 1996 and 2006, the income of the top 0.1 percent of taxpayers nearly doubled in inflation-adjusted terms, while that of the bottom 20 percent decreased. Not coincidentally, capital gains as a portion of total income decreased for the bottom quintile during this time, and increased significantly for the wealthiest Americans. Kevin Drum summarized the CRS findings: "For the rich, the amount of their income that comes from capital gains went up, while the taxes they paid on their capital gains went down. As a result, income inequality zoomed ever higher. Pretty sweet deal, no?" And the trend was obvious even before the CRS report. The Washington Post explained last September:

For the very richest Americans, low tax rates on capital gains are better than any Christmas gift. As a result of a pair of rate cuts, first under President Bill Clinton and then under Bush, most of the richest Americans pay lower overall tax rates than middle-class Americans do. And this is one reason the gap between the wealthy and the rest of the country is widening dramatically. [...] What is clear is that the capital gains tax rate disproportionately benefits the ultra-wealthy.

That the growth in capital gains income, and the benefits of lower taxes on this income, would disproportionately accrue to the wealthy shouldn't come as much of a surprise to anyone who has ever heard the old aphorism "it takes money to make money." And yet it is the exact opposite of what conservatives said would happen when they advocated deep cuts in capital gains taxes in the 1990s. Led by then-Speaker of the House Newt Gingrich and armed with an omnipresent supply of misleading-at-best talking points from dishonest right-wing think tanks, conservatives argued that cutting capital gains taxes wouldn't help the wealthy and, instead, "targets Middle America."

Speaking in San Diego in 1997, Gingrich argued for an elimination of the capital gains tax, claiming it would primarily benefit struggling young minorities who lacked access to capital:

It isn't old well-established white males who worry about capital gains taxes. It is rising young people, it is people like my daughter, who owns her own business. It is folks who are black or Hispanic, who are just now starting and trying to rise. Because they can't get any capital. And they can't get any capital, because, if you don't have enough, you squeeze out folks at the margin. [8/19/97]

In a speech to the Midwest Republican Leadership Conference three days later, Gingrich reiterated this dubious claim:

Our third goal should be equally bold on the tax side, and that is to eliminate the tax on saving, investment, and job creation called capital gains. It is a bad tax. It is a destructive tax. Chairman of the Federal Reserve Alan Greenspan said it was the most economically destructive tax we have and we ought to eliminate it. Get rid of it, and create jobs.

And we should have the moral courage to go into any community and say, "If you are not rich today, you want zero tax on capital gains, because as you rise and work hard, you're going to need to borrow the money. And the lower the cost of money, the faster you rise." It is not those who are rising who are going to get away with anything, because the fact is, if you're a woman entrepreneur, if you're a black or Hispanic entrepreneur, you have a harder time getting capital. And it's not a great break for the very rich. The very rich don't do venture capital. [8/22/97]

When Democrats opposed Gingrich's efforts to slash capital gains taxes, the House speaker perversely claimed they didn't like the cuts because they were too rich to benefit:

Capital gains was the issue on which he targeted Mr. Rockefeller and Mr. Kennedy. [Gingrich] said: "I understand that Jay Rockefeller won't like it and Teddy Kennedy won't like it. They are already rich. They're not venture capitalists. They are not out there trying to increase wealth. They are trying to just make sure they keep what their great-grandfather made."

In a typically dizzying display of self-contradiction and contorted logic, Gingrich also regularly blasted Democratic criticisms of capital gains tax cuts as "class warfare." Accurate statements that cutting the capital gains tax would disproportionately benefit the wealthy were class warfare, according to Gingrich. But peddling a tax cut that disproportionately benefits the wealthy, falsely suggesting that it primarily helps the poor, and claiming critics oppose it because they are rich? Not class warfare, apparently. 

Gingrich's denunciations of "class warfare" were echoed by, among others, RNC Chairman Jim Nicholson and Americans for Tax Reform President Grover Norquist. But none demonstrated the absurdity of the attack as clearly as then-House Majority Leader Dick Armey (R-TX). After a 1997 Weekly Standard editorial pointed out that, largely because it ended taxes on capital gains, Armey's flat tax plan would result in many wealthy Americans paying lower taxes than the middle class, Armey accused the far-right magazine of being "willing to capitulate to the old left-wing class-warfare mantra that America has rejected over and over again."

Gingrich wasn't alone in trying to convince America that capital gains tax cuts wouldn't do much for the wealthy. Rep. David Dreier (R-CA) claimed in a 1997 commentary for National Public Radio:

Until a recent morning edition commentary, I thought I'd heard the last of the outdated class warfare rhetoric claiming that a capital gains tax cut is a tax cut for the rich. In reality, the capital gains tax targets Middle America. [...] The rich don't need a capital gains tax cut. The New York Times detailed in December how the capital gains tax is becoming largely academic to the nation's wealthiest taxpayers. [...] Rather than getting bogged down in class warfare, we should pursue policies that address our three most pressing economic needs: increasing real economic growth, raising the wages of working Americans, and balancing the budget. Cutting the capital gains tax rate in half offers one of the most reliable, fair, and fiscally responsible methods of achieving those goals. [NPR, Morning Edition, 4/24/97]

In 1995, as chair of the House Republican Conference, Rep. John Boehner (R-OH) issued a press release arguing, "A Reduction In The Capital Gains Tax Will Create Economic Growth, Benefiting All Americans. [...] A capital gains tax cut will benefit the middle class. An IRS analysis of 1993 tax returns found that 77 percent of the tax returns reporting capital gains were filed by taxpayers with adjusted gross incomes of less than $75,000. Sixty percent had adjusted gross incomes of less than $50,000." [10/24/95] 

Heritage Foundation senior fellow Daniel Mitchell made a similar argument in a 1997 Knight Ridder op-ed:

[A] huge number of the people who will benefit from cuts in the capital gains and death taxes aren't rich at all. [...] The fact that some rich people — those who own the companies that provide people with jobs, for example — will benefit from these cuts is intolerable to the class-warfare liberals. And because of the capital-gains and death-tax cuts, the president is threatening to veto the entire tax-cut legislation. The administration's main argument is that the richest 20 percent of the country will get about two-thirds of the tax relief if the bills in Congress become law. The clear implication is that the tax bill will be a boon for the Donald Trumps of the world, while the rest of us scramble for crumbs. What you don't know is what the White House is counting as "rich." When most people hear "rich" they think Bill Gates or Michael Jordan. But the administration counted everyone making around $56,000 or more per year as upper income in order to be able to say the "rich" are getting two-thirds of the tax cut. Needless to say, the factory worker and teacher trying to raise two kids on $56,000 per year are hardly charter members of the yacht club." [Knight Ridder, 6/27/97]

A month later, Mitchell reiterated his claim in the Journal of Commerce: "The class warfare crowd is upset because some rich people will get a modest tax cut." It's hard to imagine a greater understatement, or one more clearly designed to mislead. (Though on the intent-to-mislead front, the focus on the number of people affected by the capital gains tax cut rather than on how much they would be affected runs a close second.)

The conservative claims that capital gains tax cuts would primarily benefit factory workers and teachers while "some rich people will get a modest tax cut" turned out to be — as was obvious at the time — entirely wrong. And yet Newt Gingrich still wants to eliminate the capital gains tax entirely, as do Grover Norquist and Daniel Mitchell. David Dreier still wants to cut them further. John Boehner still wants to retain low capital gains tax rates that rig the system in favor of the wealthy. 

Despite the clear fact that the tax code's preferential treatment of capital gains income has contributed to the growing gap between the super-rich and everyone else, rigging the system in favor of those who least need the help, these conservatives want to change the tax code to provide even more preferential treatment of capital gains income. The conclusion is obvious: This is the result they wanted all along; they were simply lying when they portrayed the cuts as a boon to the middle class and poor that would help the wealthy little, if at all.

If that weren't the goal all along, more Republicans would reconsider their policy views, as former Reagan administration official Bruce Bartlett has. In a 1997 Washington Times op-ed, Bartlett derided the "predictable assault" from "supporters of big government" on Republican tax cut proposals, dismissing concerns about the budget impact of the cuts and sneering, "As to the tax cut benefiting the rich, it is almost impossible for it not to. That is because the poor don't pay any taxes." Now Bartlett writes, "It is not class warfare to suggest that the richest 1 percent of people in society pay one-third of their income to the federal government, as they did under Ronald Reagan. [...] The important thing is for people to accept that we can no longer afford such low effective tax rates on those with the greatest capacity to pay. [...] The issue is not whether the rich should pay more, but how best to accomplish it."

When politicians advocate tax policy that will obviously benefit the wealthy at the expense of everyone else, and it then benefits the wealthy at the expense of everyone else, and they respond by advocating similar tax policies, it's pretty clear what's happening: The politicians in question, many of whom are themselves quite wealthy, are intentionally rigging the system in favor of wealthy elites. There's no reason to pretend they don't understand what they're doing.