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Stimulus bill(s), capital gains, and the President-elect

19332165Prior to the election, there was talk of a possible lame-duck session of Congress to push through a new stimulus package, despite an indicated lack of support from President Bush. Now, it’s looking more likely that we’ll see that stimulus package from Congress before the end of the year, as well as a second, larger, stimulus package early next year.

An article in today’s New York Times, citing Obama aides, explains that a stimulus package passed in the next month could consist of $60 billion in additional outlays for food stamps, extended unemployment benefits and state subsidies (there have also been indications that spending could target infrastructure projects). What might be included in a possible larger stimulus package after President-elect Obama takes office is a little less clear.

One thing we can be sure of, though: neither potential stimulus package will include lower tax rates on long-term capital gains. During the Presidential campaign, President-elect Obama proposed allowing the top rate on long-term capital gains to increase to 20% for higher-income individuals–couples with an adjusted gross income of $250,000, or individuals with an adjusted gross income of $200,000. (As a point of comparision, Senator McCain proposed temporarily reducing long-term capital gain rates.)

I bring this up because in 2003, in an attempt to stimulate the economy, the Jobs and Growth Tax Relief Reconciliation Act lowered the maximum tax rate on long-term capital gains to its current, temporary, 15% level (a zero percent temporary rate currently applies to individuals in the bottom two tax brackets). Now, I’m aware that there are a wide range of opinions out there on whether or not reducing the tax rate on long-term gains produces a net revenue benefit over the long term–there are reputable studies that say it doesn’t, and I’m not in a position to disagree. However, by most measures, the rate reduction was successful in the short-term, and had positive effects on revenue.

It’s a different time, a different situation, and a different philosophy now. I’ve got to believe, though, that the new Administration will be under a tremendous amount of pressure to reassure investors, perhaps necessitating a wait-and-see approach before taking action on the long-term capital gain rate. Then again, maybe we’ll have a better idea when the new President submits his budget request early next year.

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