TIME: Almanac 1993/TIME Almanac 1993.iso/time/112591/1125202.000

Text File | 1992-08-28 | 5.8 KB | 122 lines

                                                                                BUSINESS, Page 67

MONEY ANGLES

What George -- and You -- Should Do Next


By Andrew Tobias


    It's all falling into place: the demise of communism, the
lowering of trade barriers, the wide availability of fat-free
desserts -- even progress in South Africa, lower interest rates
and a glimmer of hope for Middle East peace. Can a drop in
homelessness and law-school enrollments be far behind? It's
almost as if everything is being tidied up for 2000, the new
millennium.

    And yet I'm nervous. We're forecasting a $350 billion
deficit (so forget a big tax break) and close to 7% unemployment
(so we need one). Consumer confidence is down, bank failures
are up, and a record 10% of us are on food stamps. We have too
many good real estate agents ("This is the bedroom; this is the
bathroom"), not enough good teachers or nurses. Too many kids
with guns, too few with fathers.

    The Republican solution is threefold:

    -- Low interest rates, which ease the strain on debt-heavy
companies and may -- or may not -- stimulate borrowing (but also
reduce interest income).

    -- "Points of light," which are easily ridiculed but
should not be. Government can't solve all problems. Private
volunteer efforts really are part of the solution.

    -- And -- seemingly the centerpiece -- another bonanza for
the rich: an across-the-board cut in the capital-gains tax.

    Apart from the equity of it (the rich have already had
their top tax bracket cut from 70% in 1980 to an effective 34%
today), you have to wonder whether a broad capital-gains tax cut
would really serve to jump-start the economy. Wouldn't it loose
an awful lot of pent-up selling pressure on the real estate and
stock markets? If the tax were cut, my own first thought
wouldn't be "Great! What can I buy?" It would be "Great! What
should I sell?" And one thing we don't need right now -- ask any
banker hanging on for dear life -- is more real estate for sale.

    If instead the cut applied only to new purchases, there
would be added incentive to buy but no added incentive to sell,
and that might help. But why is it so important to give a
special tax break to real estate, new or old, at all? Is that
what America suffers from, a shortage of office towers? A
shortage of malls? (Home appreciation already gets special
breaks -- you can roll your profit from one house to the next
and take up to $125,000 in gains, tax free, once you turn 55.)

    Yes, the capital-gains rate should be cut -- to ZERO! --
but only on future investments in newly issued stocks and bonds
(and "founders' stock"). There would be no special break for
real estate or art or gold, or for securities trading -- only
the initial securities purchaser would get the break when he
sold. Such a rifle-shot tax cut would be a huge incentive to
invest in new companies, and to fund the expansion and
modernization of old ones, but at a tiny fraction of the cost
of an across-the-board cut. It would be a boon for Wall Street,
making it that much easier to issue new securities. And it would
be a snap to administer, because broker confirmation slips
already denote newly issued stocks and bonds. In short, it would
be cheap, it would be simple, and it would do exactly what the
Administration claims it wants to do: stimulate new investment
to improve productivity and create jobs.

    (Talk of indexing gains to inflation, meanwhile, is
misguided. We need a simpler tax code, not one that requires a
computer to calculate your inflation-adjusted gains and losses.
As for the complication of a "long-term holding period," it
wouldn't be necessary under this rifle-shot plan. Initial
investors would have an incentive to let their gains mount tax
free. As for traders and speculators, why impose artificial
barriers to the movement of capital? There's nothing wrong with
a fast profit honestly come by.)

    The combination of low interest rates and a zero capital-
gains rate is exciting. But if more is needed -- and it probably
is -- it shouldn't take the form of a quick popular tax break
for the middle class, so everybody can buy one extra Nintendo.
As Harvard's Robert Reich and others have argued, it should take
the form of a big national investment in infrastructure. Much as
America needs more video games, we need repaired bridges and
roads more. (Not to mention a huge investment in our children.)
Adding to the budget deficit to give everybody a little extra
spending money is something we're not wealthy enough right now
to do. But investing in our long-term productivity is fiscally
prudent and would probably do at least as much to put people back
to work, especially in the moribund construction industry.

    As for your own financial strategy, it seems to me there
are three national scenarios you should plan for: financial
collapse, which is probably only a real possibility if we
convince ourselves it isn't; runaway inflation, which results
if instead of earning or borrowing the money America needs, we
simply print it; or -- most appealing -- gradually working our
way out of the mess through hard work, restrained spending and
wise investment in the future.

    While the government is deciding which of these three
paths to pursue, you should, as always: spend less than you
earn; borrow only for productive things (like education or
tools) or things that may at least hold their value (like
homes); have a good chunk of money someplace safe (there's
nothing dumb about having a lot of cash earning a low rate of
interest for a while); buy low and sell high. The stock market
around 3,000 ain't low. Some of the real estate being dumped on
the market, if you're rich enough to consider such things, ain't
high.