Tax Reform: A Way to Finance Society’s Needs
Senate and House conferees put their heads together next week on the final shape of the new tax bill, and the question of the moment is who will be helped and who hurt by the most dramatic revision in decades of the nation’s income tax system.
More important than which specific industry will gain or lose is one overwhelming fact of the new tax legislation: It will lower taxes dramatically for salary-earning Americans who pay their taxes through withholding and who haven’t been using tax shelters.
For these people--the great American middle class--the bill that comes out of conference will almost certainly collapse the top tax rate of 50% down to something around 30%, if not indeed to the 27% figure of the Senate version. That would mean, first of all, lower withholding and more take-home pay.
Then the legislation will either eliminate or make less attractive all the middle-class tax deductions that have influenced economic behavior in recent years. The consumer interest deduction, for example, may be eliminated or curtailed, removing the incentive to borrow on the grounds that the resulting interest payments will lower your “taxable income.”
May Affect Mortgages
The mortgage interest deduction stays for first and second homes. But it, too, becomes less attractive. It will be less economically rational, if you will, to go for the largest mortgage you can afford when Uncle Sam is “paying” less of your interest burden. Each mortgage interest dollar deducted currently would otherwise be taxed at rates up to 50%. So in taking a large mortgage you are, as business people say, “playing with 50-cent dollars.” Under the new law, the dollar deducted may otherwise be taxed at 27%, so you are playing with 73 cents of your own money.
What does that portend for the future, assuming the tax bill does pass? Increased savings.
“The tax bill represents a fundamental shift toward encouraging savings,” says Anthony Frank, chairman of San Francisco-based First Nationwide Savings. He has logic on his side: With more take-home pay and less incentive to shield it from taxes, why not save and let money earn money?
The traditionally low U.S. savings rate--usually 6% but currently running at less than 5% of disposable income--could be about to move up several notches, at tens of billions of dollars per notch. And that means many things.
An enormous reservoir of fresh capital for the investment markets, which this week at least seem to be wondering about where their next dollar is coming from.
Investment Help Offered
You can also anticipate an even greater parade of institutions vying for your savings deposits--banks, money funds, savings and loans, Sears, Roebuck. First Nationwide, which is opening branches in K mart stores, is now a subsidiary of Ford Motor.
They will be joined by other institutions offering to help you invest your savings--a trend already discernible. “Personal money management is the real growth area of the business,” says a senior official of Metropolitan Life Insurance. “Everybody wants to handle portfolios for high net worth individuals,” says a vice president at Hambrecht & Quist investment brokers. Neuberger & Berman, a traditional investment partnership for wealthy families and corporate pension funds, has started an individual investment division.
What would they all invest in? The usual stocks and bonds, plus the new and unusual--securitized mortgages and car loans, index options and futures on options. That trend, too, is visible.
“Recently I suggested to a computer expert that soon all of us would push buttons on our video screens every time we came home to rearrange our portfolios according to the best rates and prices offered worldwide,” says economist Albert Wojnilower of First Boston Corp. “ ‘You are wrong,’ he replied. ‘By the time you come home, that already will have been done automatically on the basis of the program you have chosen.’ ”
Sounds fairly boring, that brave new world. But it needn’t be. Surplus U.S. savings could seek higher returns in other, developing lands, just as British savings in the 19th Century helped finance ranching and railroad building in Texas and Argentina. Or, if we look closer to home, we could probably find a few needs in our society to which financiers with ingenuity might channel abundant savings.
Because beyond the minutiae of this rate or that deduction, we should keep in mind the philosophy that launched the tax reform effort: that the people can use their own money more wisely than can the government. We like to say we believe that. If the tax bill becomes law this summer, we will get a chance to prove it.
