TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/100989/10098900.010

Text File | 1990-09-18 | 6KB | 104 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.