Robert L. Ehrlich, Jr. memo to Tom Marr, August 5, 1999

ROBERT L. EHRLICH, JR. C COMMERCE COMMITTEE ASSISTANT DEPUTY MAJORITY WHIP MEMORANDUM Congress of tfje Uniteb States Щош of ftepregentatibeg ®Haef)inBton, Ш 20515-2002 August 5, 1999 To: Tom Marr From: Congressman Bob Ehrlich Subject: iject^-— 6apital G ipital Gains Reduction Yesterday* p»>yT5urprogram a caller referenced my letter to the Baltimore Sun regarding Fed Chairman Alan Greenspan's comments on the Republican tax relief bill. The question posed was how does a capital gains reduction impact 401(k) retirement plans. Generally, distributions from a 401(k) plan are subject to income tax. Usually, those distributions are taxed at ordinary income rates. Certain retirees who had attained the age of 50 before January 1 , 1 986, however, can qualify for the 20% capital gains rate with respect to a portion of a lump sum distribution from a qualified retirement plan. Quite frankly, I did not have this tax treatment in mind when I wrote my letter to the Sun. In the letter, I pointed out that a lower capital gains tax will benefit middle class Americans. This is due in part because middle class retirees who have accumulated large retirement funds simply will not spend all the money which they will withdraw from their plans each year. Instead, they will invest the excess in assets which, when eventually sold, can produce a capital gain. Thus, folks who never thought of themselves as wealthy are today reinvesting retirement distributions in mutual funds and other assets which will someday enjoy the benefit of a lower tax on capital gains. Indeed, a reduction in the capital gains tax has historically proven to spur investment in the stock market and other investment opportunities. Investors, including those who participate in 401(k) plans, will benefit from the influx of more money contributed to the markets by taxpayers who realize that they will have to fork over a little less of their gains to Uncle Sam. As the stock market increases, the portfolios held by middle class Americans, whether in a retirement plan or not, will likely improve. I hope this helps in explaining the need to reduce, and in my view, eliminate the capital gains tax. Sincerely, Robert L. EHrlich, Jr. Member of Congress