Pension Fund Investment Tax Plan Stirs Debate : Dispute Centers on Levy for Short-Term Stock Holdings

Possible Senate consideration of a tax on the short-term investments of tax-exempt pension funds raised protests Wednesday on Wall Street but drew support from some economists who believe that it could discourage excessive trading for quick profits.

Senate Finance Committee Chairman Lloyd Bentsen (D-Tex.), whose interest in taxing pension funds was disclosed Wednesday in an interview with the Wall Street Journal, said he is looking seriously at proposals aimed at discouraging frequent stock trading.

Pension funds currently pay no taxes on profits from their investments, but retirees are required to pay taxes when they receive income from their pensions.

Bentsen’s committee is expected to begin work early next month on its own version of a tax bill recently approved by the House Ways and Means Committee. The House bill calls for a cut in capital gains taxes, a proposal backed by the Bush Administration.

Aides confirmed that Bentsen, who opposes a capital gains tax cut, is looking at a pension tax as a possible method of raising funds to offset revenue losses from his proposal to expand tax breaks for individual retirement accounts instead.

But pension fund representatives said it would be a mistake to single them out to bear the burden of financing a new tax incentive for savings, since pension funds are the single largest pool of savings in the country.

Another Proposal

“The beneficiaries of pension funds are not the fat cats,” said James Klein, deputy executive director of the Assn. of Public & Private Pension Funds. “If you tax pension funds, there will be that much less money to pay retirement benefits.”

One proposal, suggested by Sen. Nancy Landon Kassebaum (R-Kan.) and supported by her Kansas colleague, Senate Republican leader Bob Dole, would impose a 20% capital gains tax on pension investments held less than three months. Under the plan, the tax would be gradually reduced for investments held for a longer period and phased out for assets held more than a year.

“There are number of influential senators who want to do something about the problem of churning,” a Finance Committee staff member said. “We’re taking a very careful look at any ideas to deal with the problem.”

Wall Street officials, however, said frequent stock trading--sometimes derided as churning--has diminished substantially since the stock market crash almost two years ago.

“Washington may believe there is too much churning, but they don’t recognize that the world has changed since October, 1987,” said Jeff Schaefer, senior vice president and director of research for the Securities Industries Assn. in New York. “The idea that a tax on trading would add stability to the markets and avoid a short-term perspective on Wall Street may well be outdated.”

The average volume of transactions on the New York Stock Exchange has fallen from an average of nearly 190 million shares traded per day in 1987 to 168 million per day so far this year, Schaefer said.

Could Be Beneficial

About 70% to 75% of all trading is done by institutional investors, including pension funds. Although not all institutional investors are tax free, most of their investment profits are generally exempt from taxation until they are paid out to beneficiaries.

But some economists contend that a tax designed to penalize frequent trading could be beneficial by encouraging investors to take a longer-term perspective before buying a stock.

Larry Summers, a Harvard economist who served as an adviser to Democratic presidential candidate Michael S. Dukakis, has suggested to Bentsen the idea of imposing a small tax on all stock transactions, not just those of pension funds.

“You might get people on Wall Street to stop and think if you raise the cost of transactions a little bit,” Summers said. “There are those who say you shouldn’t throw sand in the wheels of the market. But tell me who is safer under the current system. I haven’t heard a good answer yet.”

A Bush Administration task force that is studying measures designed to discourage short-term thinking by American business has not considered any proposals to tax pension funds, a senior Treasury official said Wednesday. Such a proposal would violate Bush’s pledge against new taxes, he said.

But some Administration officials are sympathetic to the idea, and the Treasury official noted that a number of big business firms are likely to support measures that might relieve pressures on corporate management to produce short-term earnings gains at the expense of longer-term investment.

Indeed, one of the most visible advocates of a pension tax is Pat Choate, a vice president of TRW Inc., a major industrial concern based in Cleveland. Choate is a prominent Washington idea merchant with close ties to a number of politicians as well as to the Business Roundtable, a organization representing TRW and other large corporations.