Election Shoo-In: A Tax Policy to Reward Saving

It’s now certain that tax policy is going to change, no matter who wins the election.

Significant tax incentives for business investment and for individual savings will be a trend in the next four years because both Republicans and Democrats recognize--even if their rhetoric doesn’t say so--that the problem of lagging U.S. investment and saving has become critical.

President Bush hinted at the coming trend in taxes in his acceptance speech at the Republican Convention. Our policy is to “prepare our people to compete--to save and invest--so we can win,” he said. In addition to a military superpower, “we must be an economic superpower, an export superpower,” the President said.

Bush said he would “reduce taxes across the board,” yet he offered no specifics on how he would do that.

But fascinating examples of new thinking on taxes emerged from meetings Bush held with Republican economists in the weeks before the convention. Most intriguing, Bush may propose some form of consumption tax--which, in a phrase, would tax the money you spend but not the money you save.

Simply put, “in filing your income tax return, you would list all savings--bank and money fund accounts, bonds and stocks--deduct their total from gross income, and pay tax on the rest,” explains Murray Weidenbaum, a chief economic adviser to the Reagan Administration who is now at Washington University, St. Louis.

“Theoretically,” adds Weidenbaum, the family home and mortgage interest deduction could be accommodated in such a tax system. Details remain to be worked out.

But the direction of tax policy is clear. Tax rates on capital gains will be cut--Bush supports a broad reduction, while Democratic candidate Bill Clinton backs a capital gains tax cut for those who start businesses.

Both favor tax support for business research and development--”We must have new incentives for research,” Bush said Thursday night. Both Bush and Clinton are for using the tax incentives to encourage worker training.

What the new tax thinking amounts to is a wholesale shift away from the 1986 Tax Reform Act, which eliminated most tax deductions and loopholes--and lowered income tax brackets to 15% and 28% for individuals, 33% for corporations.

One thrust of the 1986 Act was laudable, to end the distortions of tax shelters. But another purpose was merely political--to lower taxes in hopes that consumers would keep the economy going.

The policy is now seen to have been a failure because it took away incentives for investment. “It encouraged business owners to close factories, write off the machinery and get a tax deduction rather than invest in new machinery to make workers more productive,” Clinton said in a recent interview--even as he admitted that Democrats passed the 1986 act along with Republicans.

Not all is bipartisan in the new environment. Clinton would raise taxes on incomes above $200,000 a year to help reduce the federal deficit. Bush would not, but he would use a new kind of tax, like a consumption levy, to trim the deficit.

But whether there is any change in tax brackets or forms, the larger trend is that both candidates share a concern for lagging U.S. investment. Even politicians recognize something is wrong.

The National Science Foundation, a government agency, said earlier this month that research investment by U.S. business is seriously inadequate.

The problem goes beyond tax policy. A new report being handed around in top business circles finds fault with the whole system of U.S. business investment, which last grew strongly in the 1960s.

For more than 20 years, investment has been limping along at half the rate of earlier postwar decades as U.S. companies have been unwilling to commit to long-term development of new products, or positions in foreign markets or even of the skills of their employees. U.S. business investment lags that of Japan and Germany, even though the U.S. economy is much larger than the economies of those countries.

Unstable leadership of U.S. companies by nervous shareholders and cautious managers is to blame for such shortsightedness, argues “Capital Choices,” a research report by Michael Porter of Harvard Business School. Thirty years ago, shareholders held the average stock for seven years, but today the average stock is held for only two years, says the report which was prepared under the direction of top officers of such companies and institutions as Cummins Engine, Cooper Industries, Continental Bank and the California Institute of Technology.

A shift in tax policy alone won’t turn things around, but it can help, says Porter, author of “The Competitive Advantage of Nations.” He recommends lower taxes for capital gains on investments held for at least five years. And he recommends also that such tax relief be passed through to pension holders, an innovation that would allow retirees to pay lower taxes on pension incomes.

In ways that look well past the current recession, attitudes are changing, in business and in politics. Look for broadened individual retirement accounts and investment tax credits to return with the next Administration, whether Republican or Democratic. And look for new wrinkles in tax policy, to match the post-Cold War circumstances of the ‘90s.

The trend favors the long-term outlook for the stock market--which even so tumbled Friday--and for reasonably low interest rates. And keeping that in mind will be reassuring through the hard months of partisan rhetoric and name-calling that lie between now and November.