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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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July 14, 2008 12:01 AM ET
Bloomberg
DUKING IT OUT Expensive new programs vs. a reversal on tax policy.
John McCain started the campaign season on a positive note, vowing to cut capital gains taxes. Among those who study tax policy, there is almost across-the-board agreement on the negative impact of capital gains taxes on savings and investment. While short-run changes in the tax code are unlikely to spur substantial increases in savings behavior, increasing the returns on savings through consistent tax policies is an important part of the government's role in making saving money more attractive. All taxes reduce economic activity in one way or another, but it is the capital gains tax that is most pernicious. Following the work of Chamley, Becker and other public finance economists, the only serious debate in the economics literature is whether the capital gains tax should be zero or very low. That is why it is disappointing that Mr. McCain recently reversed his decision to push for cuts in capital gains taxes. An interesting question emerges as to why Mr. McCain made this decision. One view might be that he thought the tax cut too expensive. If that is the case, he certainly has not communicated this message. And appeals to tax cuts being too expensive are not part of his recent political language. An alternate, and in my mind more persuasive, interpretation is that he is bowing to some populist sentiment that most of the benefits of a capital gains tax cut would accrue to wealthier Americans. This would be consistent with his über-populist gas tax holiday proposal. Is Mr. McCain using quiet shifts in tax policy in an attempt to grab the populist mantle that Ms. Clinton has now laid down? It sure looks like it. Mr. Obama has put forward some modest proposals for enhancing personal savings. The first is a small-business IRA plan that looks very similar to the “Automatic IRA” proposal that has been floating around the Brookings Institution and the Heritage Foundation for quite some time. Mr. Obama's plan would require small businesses to offer their employees access to a direct deposit retirement ac-count of the type we now see in large companies. What is left unsaid is how small businesses would pay for this arrangement; many would be too small to be able to generate the pools of money that would be interesting to private sector financial services providers. Perhaps Mr. Obama is advocating a government-run plan, but from the current state of his policy briefs it is impossible to tell. He has also advocated a cash-match savings program for lower- and middle-income Americans. In this plan, individuals would receive a match of 50 cents on the dollar and could contribute up to $1,000 for money set aside in a designated retirement fund. These kinds of cash-matching programs for lower-income Americans have previously been tried on a much smaller scale and have had some modest success at increasing savings rates. What is striking about Mr. Obama's version of the plan is the income cap for eligibility—$75,000. With that kind of cap, it is sure to be a very expensive program. And it is hard to come up with a compelling reason for taxpayers to fund savings match plans for someone making $70,000 a year. The larger issues that would affect savings are being completely ignored. Taxing income creates disincentives to work. Taxing capital creates disincentives for investment. Taxing consumption creates disincentives for, well, consumption. Consumption taxes are the right approach for incentivizing savings relative to spending. And despite cries to the contrary, a consumption tax can be made just as progressive as the income tax. It is also hard to find an economist who doesn't have some good things to say about how consumption taxes would benefit the economy as a whole. While, as in any profession, political opinions vary among economists, the preponderance of the evidence for consumption vs. income taxes indicates the former would be a boon for the economy. Neither Mr. McCain nor Mr. Obama has addressed this more fundamental issue. Looming over each of the candidate's laundry list of proposals is how much they will cost. Continued large budget deficits implicitly tax our savings, making future tax increases inevitable and reducing the proportion of our savings we will actually have to spend. The non-partisan groups that have looked at the cost of each candidate's proposals have been consistent in their view that Mr. McCain's proposals will create larger budget deficits than Mr. Obama's. But I think that is only half the story. With the near-certainty of a Democratically controlled Congress, it is more likely that Mr. Obama's proposals will become law. If we are serious about increasing household savings in the U.S., we have to take a hard look at the disincentives the current tax regime imposes on savings. And we need to play the role of deficit hawks, making sure what we save today isn't mortgaged to pay the bills tomorrow. Ronald T. Wilcox is a former Securities and Exchange Commission economist and the author of Whatever Happened to Thrift? Why Americans Don't Save and What to Do About It, published last month by the Yale University Press.
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