TIME: Almanac 1993/TIME Almanac 1993.iso/time/100989/10098900.010

Text File | 1992-09-23 | 5.6 KB | 114 lines

                                                                                BUSINESS, Page 78

Money Angles

Listen Up, Tax Tinkerers: Let's Be Fair


By Andrew Tobias


    The only truly good tax, of course, is a tax on someone
else. Failing that, the best taxes are simple, fair and easy to
collect, and -- perhaps most important -- they discourage the
right things. (When you tax something, you discourage it.)

    Take the existing federal gasoline tax. Anyone can
understand it. At a flat 9.1 cents per gal., it's easy to
collect and reasonably fair, since the more you use the roads,
the more you pay for them. It also discourages things we want
to discourage: dependence on foreign oil, the trade deficit,
pollution and traffic. As taxes go, this one's a winner.

    Last week the House passed a loser, but now the Senate will
have an opportunity to ponder the same issues:

    RAISING THE TOP BRACKET. Right now the top marginal tax
rate rises to 33% for people earning roughly $50,000 to
$200,000, then falls back down to 28%. It's hard to argue that
this is fair, though I've loved every minute of it. If the top
marginal rate stuck at 33% -- for the rich and not just the
upper middle class -- it would raise billions that could be used
to lower other taxes.

    RESTORING AN IRA DEDUCTION. We spend more than we produce
and fail to save nearly enough to remain competitive. Restoring
the Individual Retirement Account incentive, as House Democrats
proposed, would nudge the average family to spend a little less
and save a little more -- just what the doctor ordered. More
saving and less borrowing would also tend to lower interest
rates, which would benefit rich and poor alike.

    The Democrats' proposals to allow early IRA withdrawals to
fund tuition or buy a first home, however, would complicate the
now simple IRA, raise the potential for abuse and reduce the
amount ultimately saved for retirement. Congress might better
allow IRAs to be pledged as collateral on education loans and
first-home mortgages. Any tinkering should focus on how to get
people to put more into IRAs (perhaps by raising the $2,000
annual allowable contribution, even if the excess were not
deductible) rather than on ways to let them take money out.

    CUTTING CAPITAL GAINS. A broad tax break for capital gains,
as the House approved and President Bush supports, would in the
long run be expensive and dumb. Applying the break to
investments we already own does nothing to encourage us to make
new ones. Any tax break should be on future investments only.

    But even there, restoring a two-tiered system -- with one
income-tax rate for "ordinary" income and a lower one for
capital gains -- would do little more than restore the incentive
to concoct schemes to convert the former to the latter. We don't
need more tax lawyers and tax-driven strategies to compete in
the world marketplace; we need a simple tax system that doesn't
distort economic decisions.

    The notion of indexing gains to inflation -- to tax only
"real" gains -- would add a whole new level of complication in
computing taxes. And is it fair? It insulates those with real
estate and stocks and fine art from the effects of inflation but
not those without appreciable assets, whom inflation hits
hardest. (Homeowners already have big tax breaks. They're
allowed to roll gains tax-free from one home to the next and,
at 55, avoid tax altogether on $125,000.) Furthermore,
insulating voters from inflation makes them more tolerant of it
and thus its rise more likely -- but its effects, ultimately,
no less devastating.

    And why cut the capital-gains rate across the board? To
fuel real estate fever in Beverly Hills? To inspire construction
of even more shopping centers? It would be far cheaper and more
effective to pinpoint the tax break where it's most needed: to
encourage formation of new companies and expansion and
modernization of existing ones. Any capital-gains tax break
should apply only to owners of "original" shares -- namely,
company founders and venture capitalists -- and to purchasers
of any new stock or bond offering. Investors who merely bought
existing securities from each other should get no special break.
(Neither should investors in real estate companies, lest
thousands of them be set up simply to qualify for this tax
break.) Brokerage confirmation slips already distinguish
securities purchased in public offerings, so keeping track would
be easy.

    Finally, tying capital-gains tax breaks to a holding period
of a year or more -- or even a day -- makes no sense. Why
distort the market this way (and dampen its liquidity)? Why
shackle the invisible hand? The decision of how best to invest
one's capital should depend on where it can get the best return,
not on tax strategies. There's already plenty of reason to hold
assets a long time: first, you minimize brokerage commissions;
second, there's no tax due until you sell, so you can let your
profits build tax-free for decades. The real movers and shakers
in the market, the pension funds, pay no capital-gains tax
anyway, so imposing a long-term holding period on the rest of
us would have little impact on management's rightly lamented
short-term focus.

    In short: let's raise taxes on the rich so they pay as
much, on the margin, as the only fairly rich. Let's use that new
cash to restore or even enhance the old IRA incentives. And
let's offer a capital-gains tax break only to people who can
really do the economy some good: those who found or fund private
enterprise.

    Too costly? Any shortfall in this package could easily be
met by adding a few pennies to the gasoline tax.