MARCH 19, 1997
STATEMENT OF REP. CHRISTOPHER COX
CHAIRMAN, REPUBLICAN POLICY COMMITTEE
ON BALANCING THE BUDGET
IN A LOW-TAX ENVIRONMENT

Chairman Archer, I want to commend you for your leadership in holding these hearings today, and I welcome the opportunity to talk about the urgent need for tax cuts. I know most of my colleagues on this Committee agree with me that it is absolutely essential that the budget be balanced in a low-tax environment.

We are all working in this Congress to achieve a balanced budget, but to do this without tax cuts would be a grave mistake. A balanced budget in and of itself will do little to encourage economic growth in this country if it is based upon high rates of taxation and government spending.

Taxes which directly tax savings and investment are even more detrimental to our economy--by increasing the cost of capital they slow the rate at which the economy can expand and they make it more difficult for all Americans to save.

The key to an effective balanced budget is the level of taxation we can tolerate, not the amount of spending we want. It is imperative that we determine the appropriate amount of spending from the amount of tax disruption that spending causes, not by how many programs we like here in Washington D.C.

I'd like to focus my testimony today on the capital gains tax and the estate tax--the source of much of our tax code's bias against savings and investment. The current capital gains tax and estate tax dramatically increase the cost of capital, penalize savings, disproportionately damage small businesses--slowing economic growth and hurting federal payroll and income tax collections that would otherwise take in more under a healthier economy.

Specifically, I'm here to call for a 50% cut in the capital gains rate and complete repeal of the federal estate tax. These two elements should be a crucial part of our goal of balancing the budget in a low-tax environment. I hope that this Committee will make it a priority to approve cuts in both of these anti-growth, unfair taxes, so that we can send legislation to President Clinton this year.

These two tax cuts complement each other in a number of ways, aside from their inherent damage to our nation's growth. The effect on revenue from cutting these taxes will, far from hurting federal tax collections, in fact lead to increased revenues, especially in the short term from increased capital gains realizations, and in the long term through increased payroll, income taxes, and corporate tax collections that will arise from more vigorous economic growth.

The historical evidence is irrefutable--carefully-crafted capital gains rate cuts can increase tax revenues:

o In 1982, the capital gains tax rate was cut to 20%. The Joint Committee on Taxation predicted a massive loss in government revenue. Yet, over the next five years, capital gains realizations increased by 362%; federal revenue from the capital gains tax grew 385%, from $12.9 billion in 1982 to $49.7 in 1986.

Precisely the opposite phenomenon occurred in 1986, when Congress decided to increase the capital gains tax rate.

o In 1986, the capital gains tax rate was hiked from 20% to 28%--an increase of almost 40%. The Joint Committee on Taxation told us that this would be a great way to raise more funds for the U.S. Treasury. Yet, in the first year alone, both realizations and revenues plummeted, falling 56% and 34% respectively. This was hardly a one-time phenomenon: even in 1996, the 28% tax rate was still producing revenues significantly less than the 20% rate that had been in effect in 1986.

Cutting the current capital gains tax rate in half, as Republicans proposed last year, could generate $20 billion in additional revenues over the next six years, according to testimony presented to the House Small Business Committee.

Repeal of the federal estate tax, by contrast, would have its greatest effect on the economy and on federal tax collections just as the initial effects of reducing the capital gains tax rate are beginning to stabilize. Repeal of the estate tax will allow vast reserves of capital to be put to their most productive use--not hidden away, diverted from business operations for estate "planning," or not driven into less efficient uses as estates are liquidated to pay the tax man. These burdens--compliance and enforcement costs, and litigation--consume 65 cents for every dollar collected by the estate tax.

Repeal of the estate tax will lead to dramatically increased federal tax collections from income and payroll taxes after a few years:

o Repealing the estate tax this year would boost annual economic growth by $11 billion, create 145,000 new jobs, and raise annual personal income by $8 billion, according to the Heritage Foundation.

o As a result of this additional economic growth, federal payroll and income taxes will be more than enough to offset any short-term revenue loss from estate tax repeal.

o A retrospective study of the economy over the last 20 years showed that net annual federal revenues would have been $21 billion higher if the estate tax had been repealed 20 years ago.

Mr. Chairman, too many people inside the beltway seem to think that they know what is best for the American people better than the American people do. This kind of thinking results in dangerous concepts such as "paying for tax cuts," as though the money belongs to the government rather than to the people.

Our tax code today punishes savings, rewards spending, and double (and sometimes triple) taxes income, making it virtually impossible for parents to provide for their children and save for the future. It is basic human nature that after we have taken care of our immediate needs--food, clothing, shelter and the like--we want to make life better for our children and loved ones. I work, you work, and every American in this country works not just for himself or herself, but for his or her family, for those we care about.

Rather than seek to reverse human nature, which the death tax and the capital gains tax do, our tax code should tap this force as a powerful engine for wealth creation.

Again, Mr. Chairman, thank you for giving me the opportunity to testify before you today.