Lower Capital Gains

At a time when most Americans are engaged in the annual exercise of procrastinating on filling out this year's income tax returns, some very high-earning people and their accountants are already taking prudent looks ahead to the returns due in 1973. Reason: after a series of changes over the past two years, their earnings on Jan. 1 became fully subject to important new anti-loophole laws. These were passed by Congress primarily to crack down on a few persons with incomes of more than $200,000 who legally, through various gift and investment devices, get away with paying no income taxes. The new rules also close off some broad tax avenues long favored by entertainers, athletes, top executives and others in high brackets.

One major change involves the tax paid on capital gains--the profits on stocks, real estate or other investments that have been held for six months or more. Previously, as an incentive for private investors to expand the economy, the highest tax on such gains was 25%, a far smaller bite than that on regular income in the upper tax brackets. Under the new law, the tax on capital gains for many high-income people can be as much as 35%; under highly complex rules that add still other taxes, it can go up to 45.5%. At the same time Congress sliced the maximum personal tax on salaries and other "earned" income from 70% to 50%, largely because almost no one who earned in the top bracket ($200,000 or more) actually paid the straight tax.*

The new law will drastically reduce the tax gap between regular income and investment gains. Thus ultrahigh-salaried taxpayers like corporation chairmen and pro football stars have much less reason than before to dodge taxes by converting, often through gimmicks like buying non-productive farms, part of their earnings to "capital gains." The law also chips away at incentives to make more conventional investments. Says George A. Kuhnreich, vice president of Ungerleider, Haidas & Co., a brokerage firm that services many wealthy investors: "It eliminates a good part of the rewards that used to be given to the long-term investor. It will mean greater liquidity--take the money and run."

Farewell Angel. For one thing, says Bernard Greisman, a Manhattan tax lawyer who edits the annual J.K. Lasser guide, Your Income Tax, "the play has been taken out of holding on to a hot stock." Under the old rules, the tax differential between long-and short-term gains encouraged investors to keep their stocks for at least six months. Greisman believes that the new rules may result in a more volatile stock market, with many more "in and out" deals.

The new law will also discourage such extremely risky ventures as investing in wildcat oil drilling and backing Broadway plays. The reason is that in the past, high-bracket investors could write off expenses on such projects from their regular income, yet declare any profits from the sale of the investment at the preferential capital-gains rate of 25%. The narrowing of the difference between those two rates in some cases hardly makes the great risks of failure worthwhile.

Indeed, the new 50% "max-tax" on earned income has thrown a whole cashbag full of deferred-income schemes into question. Martin Bregman, a Manhattan-based financial adviser to many entertainers, says that now "it's hard to get a major star to go for" a low-salary deal that includes stock in the enterprise producing a film. Previously, some of the same stars were willing to hope for an increase in the value of such stock, which could be disposed of in a capital-gains arrangement. Business executives may well question the value of stock options, which carry the risk of losing in value, as a substitute for heftier salaries. In some cases, it will hardly make sense to bet that such stock will eventually show a great appreciation, which is taxed as a capital gain. Many executives may want to try to negotiate raises rather than put their trust in options.

*However, this rule does not benefit the nonworking rich, who must continue to pay taxes at the old rates on interest payments, dividends and other "unearned" income.

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