TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/081489/08148900.010

Text File | 1990-09-17 | 4KB | 77 lines

BUSINESS, Page 53

Losing Big on Capital Gains

A shortsighted plan to slash the tax rate may be unstoppable


    In an election campaign largely unencumbered by substance,
Democrats and Republicans last year were sharply divided by one
pocketbook issue: whether to cut the tax on capital gains. George
Bush favored the move as a way to encourage investment and create
jobs. Democrats attacked it as welfare for the wealthy, since
nearly 70% of individual capital gains are reported by taxpayers
earning $100,000-plus a year.

    Since the election, though, many Democrats have begun to see
a certain expediency in welfare for the wealthy. The reason: a cut
in the capital-gains tax would produce a burst of revenue for the
Treasury, helping Congress meet its targets for reducing the
federal budget deficit, at least in the short term -- the only term
that seems to matter in Washington. During the first few years of
a lower tax, investors would rush to realize the appreciation on
their stocks and other assets and thus pay taxes on them earlier
than planned. Once this spurt of early tax collections was
exhausted, however, a lower capital-gains rate would produce much
lower revenues.

    As Congress adjourned last week for its August recess, the
capital-gains-cut bandwagon gained momentum. Amazingly, Republicans
and conservative Democrats, who make up a narrow majority of the
House Ways and Means Committee, rallied around a scheme even more
shortsighted than the President's.

    The Administration plan would cut capital-gains taxes to 15%
but would also phase in a rule requiring investors to hold an asset
for three years in order to qualify for this rate. The House
measure, proposed by Georgia Democrat Ed Jenkins, would cut
capital-gains taxes to 20% on investments held at least a year. But
the cut would be short-lived; in two years the rate would return
to 28% with indexing for inflation. Investors would be sure to roll
over their assets and produce a quick windfall for the Treasury --
at the expense of future tax collections. House Speaker Tom Foley
calls it "robbing from future generations." Lawrence Summers, a
Harvard public-finance expert, calls it "probably the worst tax
proposal in the history of the Republic."

    If the President and Congress are serious about spurring new
investment and jobs, insist experts on Wall Street, in Silicon
Valley and in academia, they should redesign their tax reform. Some
of the experts' suggestions:

    Target new investments, not old ones, by cutting capital-gains
taxes only on assets bought after, say, Jan. 1, 1990.

    Offer a larger tax cut for investments that are held longer,
and raise the tax sharply for speculation in which assets are
churned in days or minutes.

    Close the loophole that exempts inherited assets from
capital-gains tax, a reform that would be worth $5.5 billion a year
in new revenues.

    End the capital-gains exemption for pension funds. New York
City investment banker Felix Rohatyn believes that the funds'
managers would then focus more on productive investment rather than
on short-term speculation.

    Impose a security-transactions tax on each sale of a stock or
bond to further encourage longer-term investment over churning. At
the 0.5% rate charged by Britain and Japan, such a tax would raise
$10 billion a year for the Treasury.

    Cut the tax subsidy for corporate borrowing, which now distorts
investment decisions and encourages the use of debt for speculative
purposes.

    Sadly, such measures may be a little too bold to be entertained
by Congress when it reconvenes in September. The Jenkins plan would
be "a terrible thing for the economy," admits a congressional
economist, "but it solves so many political problems for so many
people that it may be unstoppable."