TIME: Almanac 1993/TIME Almanac 1993.iso/time/021290/0212207.000

Text File | 1992-08-28 | 6.1 KB | 129 lines

                                                                                BUSINESS, Page 51

MONEY ANGLES

A Tax Cut That May Truly Cost Nothing


By Andrew Tobias


    Suddenly there are a lot of tax proposals back on the table.
This is too bad, because changing the tax law every five
minutes enriches accountants and attorneys but just confuses
everyone else. So there's a lot to be said for leaving things
alone. That's certainly the case if the alternative is the
President's broad capital-gains cut. A focused capital-gains
cut would cost far less and accomplish as much or more, and
without the paperwork. But first a little background:

    -- A Texas millionaire in 1981, at the dawn of the
Reagan/Bush era, was in the 70% marginal tax bracket. Of the
next $1,000 he earned, $700 went to the Federal Government.
Today he's in the 28% tax bracket.

    -- By contrast, the rich Texan's plumber, self-employed and
earning $30,000, was in about the 40% marginal tax bracket. Of
the next $1,000 he earned, $400 went to the government -- $100
or so to Social Security, $300 to income tax. Today he's in the
43% bracket.

    Into this breach rides Mr. Bush with a plan to cut the
capital-gains tax as much as 30%. Oh, sure, the wealthy would
reap 90% of the cash benefit. But those who've pegged the plan
a giveaway to the rich Mr. Bush calls "demagogues."

    All of which would be fine -- really -- if the plan met its
stated goal: to encourage investment and thus help America
grow. But it doesn't. The rich already invest most of their
money. What else are they going to do with it? Mr. Bush's broad
capital-gains cut would not persuade the rich -- or anyone else
-- to forgo a second VCR and invest that $300 instead. Yet
that's exactly the kind of persuasion America needs these days:
less consumption, more investment.

    Under Mr. Bush's plan, the great middle class would
supposedly be lured to invest because after that $300 had grown
by $200, say, the tax on the gain would be $15 or $20 lower.
"Honey! Forget the VCR! The President says that if things work
out with our investment, we could save $20 on our 1996 taxes!"
(Bush's other proposal -- the  family-savings plan -- would
mainly encourage people to move money from their current
savings accounts into these new ones.)

    Liberalizing the limits on Individual Retirement Account
contributions, by contrast, would give the typical middle-class
taxpayer an immediate $85-to-$115 tax break for choosing the
IRA over the VCR, depending on local tax savings, if any.

    Either plan -- a broad capital-gains cut or liberalized IRA
deduction -- would cost a fortune. (A bargain capital-gains tax
rate would shake loose revenues at first as investors sold to
take advantage of it but in the long run come back to bite us.)
So it may be that given the deficit, we can afford neither.

    Yet if the goal is truly to spur investment, there's an
efficient, inexpensive way to do it: cut the capital-gains tax
drastically, but apply the cut only to founder's stock (anyone
who starts or invests in a new company) and to securities
purchased in a public offering (for example, when a new company
goes public or when GM issues $1 billion in new securities to
modernize its factories). And don't make the cut retroactive,
as the President inexplicably would. How does that help spur
future investment? Just apply it to investments made from now
on.

    A focused capital-gains tax break would cost little, or
nothing if it fostered growth, because it would not apply to
most transactions -- barely 1% of all stock-trading volume
represents purchase of new shares -- or to profits on real
estate, art, gold or the like. Yet precisely because it would
be focused, it would skew investment toward the things we need
even more than new malls: new businesses and the expansion and
modernization of existing ones.

    Focused or not, two things any capital-gains tax cut should
not include are provisions for indexing and a holding period.
Indexing gains to inflation introduces a whole new level of
complication and paperwork at a time when taxes are, to put it
mildly, complicated enough. And it protects the wealthy who
have assets to protect from inflation, but not the average
family, with little in the way of assets besides its house
(already largely sheltered from capital-gains taxation)  and its
retirement funds (sheltered as well).

    A long-term holding period would lead investors back to the
old days of basing decisions on tax strategy instead of
economics. And it would put a chill on trading, which means
less liquid markets, especially in small stocks. Liquid markets
are a prime U.S. asset. A long-term holding period would do
little or nothing to cure management's short-term perspective,
since the big market action comes from pension funds and others
not subject to tax at all. And there are already big incentives
to holding investments for the long term. You minimize
commissions and pay zero tax until you sell. Your money can
compound tax free for decades.

    Finally, one must mention the onerous Social Security tax.
As all but the rich know, it is onerous. But now, with the
nation running a large deficit, is not the time to cut it. (Let
alone privatize it, which makes no sense at all. You'd just
have to pass a new "emergency net" for the millions who,
despite good intentions, would not manage to save for their old
age -- which was all that Social Security was intended to be
in the first place.) Cutting the Social Security tax would just
mean a larger deficit and, on the margin, the purchase of more
VCRs. Now is not the time for increased consumer spending.

    But Senator Moynihan is quite right: in light of the Social
Security tax burden, it would be outrageous to give rich folks
yet another broad tax break. It's mind boggling that this
actually passed the House last term, to be kept from enactment
only by the Senate. One hopes the Senate, led on this issue by
the likes of Senators Bradley, Bentsen and Moynihan, will show
the same good sense again.