Capital Gains, The Class Struggle By Rudy Fichtenbaum +quot; The recent vote by the House

         Capital Gains, The Class Struggle
         
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         By Rudy Fichtenbaum * 
         
         
         
         
         
              The recent vote by the House of Representatives in favor 
         of reducing the capital gains tax has led many politicians, 
         pundits and member of the news media to declare that the 
         class struggle is dead.  Mark Twain once remarked, "the 
         rumors of my death have been greatly exaggerated."  So it is 
         with the class struggle.  The recent vote provides 
         incontrovertible evidence that the class struggle is alive 
         and well and that the super-rich, who head our country's 
         largest corporations, are still on the offensive.
         
              In fact, the passage of this legislation aims at 
         completing the agenda begun by Ronald Reagan to eliminate the 
         progressive income tax by lowering the taxes of the rich and 
         increasing the taxes of working people.  Reagan began by 
         reducing the top tax rate from 70 percent to 50 percent in 
         1981.  Then in 1986, under the guise of simplification, the 
         rate was further reduced to 28 percent.  At the same time the 
         minimum tax rate for families was increased from 11 to 15 
         percent.
         
              Under the old tax law, when maximum rates were at 50 
         percent for the rich, capital gains were taxed at a lower 
         rate of 20 percent.  A property owner reaps a capital gain 
         when an asset is purchased at one price and then sold at a 
         higher price.  Thus many corporate executives and bankers, 
         who earned millions, chose to receive most of their 
         compensation in the form of stock options.  This allowed them 
         to purchase a certain number of shares of stock below the 
         market price.  When they resold their stock at a higher 
         price, they earned millions taxable at the lower 20 percent 
         rate.
         
              Still not satisfied with this form of wealthfare, the 
         super-rich and their representatives in Congress pushed to 
         further lower the highest tax rate to 28 percent.  To achieve 
         this lower rate, they claimed to be willing to give up the 
         lower tax rate on capital gains and allow capital gains to be 
         taxed as ordinary income.  This was just a strategy to lower 
         taxes for the rich, who fully intended to come back to 
         Congress and demand preferential treatment for capital gains 
         to be restored.
         
              According to the Congressional Budget Office (CBO), 
         about 70 percent of all capital gains go to the top 10 
         percent of taxpayers and 54 percent to the top 2 percent.  
         The proposal just passed in the House would lower taxes on 
         capital gains to 19.5 percent for two years and then increase 
         the tax rate.  This is a rich taxpayers' cost-of-living-
         allowance.  It means that capital gains that are less than 
         the rate of inflation will not be taxable.
         
              Proponents of the capital gains tax reduction argue that 
         it will lower the deficit by $5.3 billion because of the 
         selling frenzy created by the two years of lower rate.  After 
         two years, the cut in capital gains will cause a decline in 
         tax revenues, making the deficit even larger.  Then this 
         group of super-rich will call on Congress to cut more social 
         programs or to raise taxes on working people.
         
              The alternative to the capital gains cut put forward by 
         the leadership of the Democratic Party was to raise the top 
         tax rate on income over $150,000 to 33 percent and restore 
         IRAs for all taxpayers.  This proposal was immediately 
         labeled as another Democratic tax increase.  Of course the 
         media did not bother to point out that in the last seven 
         years of the Reagan administration taxes were increased six 
         times to the tune of $120 billion.
         
              Despite the rhetoric and propaganda, a Wall Street 
         Journal/NBC poll showed that 49 percent of registered voters 
         supported raising taxes on the rich, while only 39 percent 
         supported cutting the capital gains tax.  Even these figures 
         are deceptive, because a larger percentage of the affluent 
         tend to vote.  When this difference is accounted for, the 
         vast majority of the people favored increasing taxes on the 
         rich.
         
              Ignoring this majority view, a coalition of conservative 
         Democrats and Republicans voted in favor of cutting capital
         gains.  To these legislators democracy means democracy for 
         the rich.  The supreme irony is that politicians, pundits and 
         their media supporters all have high praise for 
         democratization in the socialist countries while shamelessly 
         subverting the will of the majority of the American people. 



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         * Rudy Fichtenbaum is a professor of economics.