TALK about momentum! Congress and the Bush White House are working on a number of innovative proposals designed to help lure investors - including small savers - back to the financial markets. The downside, according to financial experts, is that in its haste for reform, Washington might be tempted to substantially revise the Tax Reform Act of 1986. This could confuse some investors about federal tax policies, thus causing them to defer investment decisions until a later time.
Thousands of investors fled the equities market after the stock market crash of October 1987. Now efforts are under way to win them back. The current rush toward a broad re-examination of existing financial laws ``is sort of like when snowballs start rolling down hill,'' says Robert Hamada, deputy dean and professor of finance at the University of Chicago's Graduate School of Business. ``Once a topic starts to get discussed, [such as capital-gains reduction] it opens up other avenues for change.''
``Change'' is being broached on at least three key fronts:
Leading members of Congress, including Sen. Lloyd Bentsen, Democratic chairman of the Senate Finance Committee, are seeking a broad restoration of tax deductions for contributions to an individual retirement account (IRA). Contributions to existing IRAs were sharply limited by tax reform. Senator Bentsen argues that the limitations on IRAs are a major factor in the fall of the savings rate in the US from more than 5 percent before tax reform to around 4 percent after. In the first half of this year, they spurted again above 5 percent, perhaps as consumer fears of recession rose.
The Bush White House continues to push for a cut in the capital-gains tax, the tax on profits from the sale of real estate, stocks, and other financial investments. Although the reduction has been vehemently opposed by the Democratic leadership in Congress on the grounds that it would mainly benefit the wealthy, a reduction in the capital-gains tax was supported last week by the House Ways and Means Committee. The House committee voted to cut taxes to 19.6 percent from 28 percent (for most taxpayers) for two years.
Finally, in perhaps the most unexpected suggestion, Treasury Secretary Nicholas Brady proposed last week that Washington ``work toward the goal of ... removing the double taxation of dividends.''
Currently, taxes are paid on dividends twice, once at the corporate level, when a business pays the tax on its profit, and secondly, by the individual receiving the dividend check. The administration is reportedly also studying the possibility of granting tax breaks to corporations that give executive bonuses in the form of stock, rather than cash.
``We're very encouraged by what seems to be a change of attitude in Washington these days about the need to take steps to foster savings,'' says Thomas O'Hara, chairman of the National Association of Investors Corporation in Royal Oak, Mich. The association is comprised of some 132,000 individual investors.
Mr. O'Hara's group recently surveyed a number of its members about how best to woo individual investors back to the stock market. They support a lowering of the capital-gains rate so that the US can ``better compete with overseas nations, many of whom have a far smaller capital-gains rate than the US,'' he says.
Some congressional analysts now believe that not only will a reduction in the capital-gains tax be approved by Congress - adding up to a big victory for President Bush - but that Congress will approve an expanded IRA program as well.
Not all financial experts are enthusiastic about the new momentum for reform.
``I'm sort of sorry about the broad inquiry now under way'' in changing investment policy, says Dr. Hamada. He believes that any major restructuring of investment policy - such as Treasury Secretary Brady's surprise proposal - could have an adverse impact on investment by confusing investors about tax law in general, or, in some cases, causing individuals to defer current investment decisions to wait for ostensibly better tax treatment down the road at some point.
The wiser approach, he says, would be to allow the Tax Reform Act of 1986 to take effect for several years, and then, if necessary, make gradual changes over time.