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Strategies & Market Trends : Stock Attack II - A Complete Analysis
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To: Terry Whitman who wrote (19450)9/20/2001 9:31:49 AM
From: Art Bechhoefer  Read Replies (1) of 52237
 
>>Isn't it simply making a differentiation between investment income and wages.<<

Terry, yes, that's exactly what a capital gains preference does, and why so many economists object to the preference. It is quite easy and routine to provide company executives, particularly in new companies, with a salary consisting of part cash and part stock. You hold the stock for a year or so, and if the company has done well, you sell the stock and capture the rest of your salary, but at a lower tax rate than direct salary payments.

The obvious result is to create elite groups who pay lower tax rates than others receiving the same amount of income. This creates inequities and distortions. A capital gains preference should not create inequities. What it should do is merely preserve the willingness of an investor to take risks by eliminating the risk of inflation. Any preference greater than the rate of inflation amounts to nothing more than a gift to a privileged few.

Congress, which is not known for great intellectual feats, apparently believes that the current formula of 20 percent after a year, and far less than that after five years, is the only way to approximate this inflation protection. Now they want to simplify it even more by eliminating the tax altogether. It is a very simplistic approach that does more damage than anything else by creating even more inequities than the present formula.

Art
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