Money Angles

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.