Reprint permission from the October 1, 2001 issue of Crain's Chicago Business.
The atrocities we witnessed Sept. 11 sent a shock wave through United States and world financial markets. And Congress has no choice but to forge an economic stimulus package to shore up public confidence and spur investment.
When U.S. equity markets reopened Sept. 17, the major indexes fell to their lowest levels in nearly three years. Not even the Federal Reserve's half-point interest rate reduction, the eighth cut this year, could forestall the Dow Jones Industrial Average's worst point drop in history.
Insurance and travel-related companies were hit the hardest. But retailers, financial firms and others that depend on consumer confidence and consumer spending also issued profit warnings. Most economists now agree that our fragile and sluggish economy didn't dodge a recession, after all.
Congressional leaders are being tested as they never have been before. Our national tax policy and the opportunity to rebuild our faltering markets and the economy they reflect should not be neglected. Following are some recommendations for our lawmakers' consideration:
Let's cut the capital gains tax. For months, a few Republican leaders have been touting a capital gains tax cut to encourage individual investors to take profits. These legislators know that some investors cautiously bought high-quality growth stocks years ago and still hold them, and that others have big unrealized gains in speculative stocks they bought in the new economy's early days.
The legislators who argue that unlocking money tied up in such stocks would invigorate the economy and encourage new investment are absolutely right. Simply put, a reduced capital gains tax puts more money into investors' pockets, to spend as consumers and to invest as risk capitalists.
Since capital gains tax relief would immediately be factored into the value of stocks, investment returns would instantly rise and capital costs plummet. History tells us so: After capital gains tax rate cuts in 1981 and 1997, the stock market and the economy both saw riptide gains.
Let's hike the capital loss deduction. Most investors the less fortunate ones need immediate help to deal with huge capital losses.
When an individual taxpayer's capital losses exceed his or her net capital gains, only $3,000 of net loss can be written off against the ordinary income, with the excess carried forward against future years' capital gains. Three thousand dollars has been the magic amount since 1978. It's long overdue for an
Alaska's Republican Sen. Frank Murkowski and California's Democratic Rep. Zoe Lofgren both introduced legislation in April to increase the capital loss limit. Their bills are languishing in committee, and they need to be taken seriously.
Let's encourage capital purchases. Offering accelerated depreciation allowances for new equipment purchased within the next six months would stimulate capital investment. So would a temporary, dollar-for-dollar tax credit for new capital equipment. The investment tax credit has been a feature of the
Let's repeal the alternative minimum tax (AMT). The AMT denies companies with large net operating losses the right to deduct them. The tax is a holdover from the days when artificial accounting losses were engineered to create abusive tax shelters. Today, it discourages investment, and it should be written out of the tax rule book.
All investors and all Americans have reason to join together and support a revamped, investor-friendly tax code.
Marc J. Lane is a Chicago lawyer and financial planner and an adjunct professor of law at Northwestern University School of Law. He can be contacted at [email protected].
Marc J. Lane ([email protected]) is a Chicago lawyer and financial planner and an adjunct professor of law at Northwestern University School of Law. His recently published book is Advising Entrepreneurs: Dynamic Strategies for Financial Growth (John Wiley & Sons, Inc.).
Copyright © 2001 by Crain Communications Inc.