Lott Wants Cuts in Payroll Tax, Capital Gains Tax

The movement for additional federal tax cuts gained momentum Monday as the Senate's top Republican suggested Congress consider coupling a reduction in the payroll tax that funds Social Security with a cut in the capital gains tax to give the struggling economy a fresh infusion of cash.

"There are people, at the entry level, who are hit very hard by the payroll tax," Senate Minority Leader Trent Lott told reporters. "If you're trying to get money into working people's pockets quickly, that's one option you could consider."

Lott said President Bush favors the idea but perhaps not implementing it right away. "It's not a question of if, it's when," he said.

Democrats stopped short Monday of embracing a cut in the 15.3 percent payroll tax, which is shared equally by workers and employers, but some influential Democrats refused to rule them out and agreed that any further tax relief be targeted at people who earned so little money that they did not receive a tax rebate check this year.

"It should be something that gets money into people's pockets quickly and it should to go those who were denied any assistance in the first round," said Senate Budget Committee head Kent Conrad, D-N.D. "They would be the most likely to spend it."

Republicans have also been pushing to cut the capital gains tax, which now tops out at 20 percent, to 15 percent for two years as an economic stimulant and to boost government revenue as people sell investments.  Many in the GOP believe this will also help Congress deal with a shrinking budget surplus.

Sens. Phil Gramm, R-Texas, and Zell Miller, D-Georgia, said they would introduce legislation Tuesday to cut the capital gains tax.

Many Democrats criticize that proposal as tilted toward the wealthy and worry about the long-term costs. But official congressional estimates of a bill sponsored by Rep. Paul Ryan, R-Wis., say this "unlocking" effect could raise $1.2 billion in 2002, $1.6 billion in 2003 and $7.6 billion in 2004.

That would help the government avoid dipping into Social Security next year to pay for other federal programs. That political promise is imperiled by shrinking surpluses due to the recently enacted 10-year, $1.35 trillion tax cut, as well as the economy's ills.

Ryan is a member of the tax-writing House Ways and Means Committee and said a capital gains tax cut would lower the cost of investment – leading to greater job creation and an improved economic picture.

"The sagging economy is making this almost mandatory," said Ryan, R-Wis. "It will not only boost revenues, but it will boost investment."

But Democrats see several problems with a capital gains tax cut. One is the long-term cost: After the early years' increase, Ryan's bill would reduce revenue by a net $10.5 billion over 10 years. A permanent cut would be far more costly.

Democrats also say reducing the capital gains tax primarily benefits the wealthy, adding to what they say is an upper-income tilt in Bush's tax cut. According to the nonpartisan Joint Committee on Taxation, in 1999 more than three-quarters of capital gains taxes were paid by taxpayers earning more than $200,000 a year.

"Why we would want to more top-load tax cuts, given the circumstances we're facing already, is something I can't understand," said Senate Majority Leader Tom Daschle, D-S.D.

The Associated Press contributed to this report.