Undeserving of a Break Today: Short-Termers

In the last few days, I’ve heard back from Wall Street. I’ve been described as a communist, a flag-waver and a right-wing fanatic, which I think means that the investors and brokers are plenty angry. To challenge their loss of faith these days, and I did, means that I must be pretty awful, and what could be more awful than a right-wing communist fanatic wrapped up in red-white-and-blue?

So let me bear down a little more.

Yes, I think investors were fainthearted for cutting and running when the markets reopened Sept. 17. But let’s turn our attention to something even more damaging that they have on their minds right now: a tax cut for their everyday follies.

That is, they want to seize on economic turmoil to make the stock markets even more frenzied and shortsighted for years to come. They want to cut the capital gains tax again.

And Congress, desperate to restore some spine to our nation’s investors, just may accede to this injustice.

The trouble is, the people who would benefit are those shortsighted hunch bettors who don’t have any interest in the stability of companies, the jobs of workers or the well-being of the country. They’re in it for the thrill of the game and the chance for instant gain.

Friends, one of our most cherished national principles is being distorted: rewarding hard work.

Instead of a simple rate cut, we should adjust capital gains taxes to provide stability for business and security for workers, and we can do it in a way that encourages investment too. I’m talking about rates that reward long-term investment and penalize short-term “playing” in the market.

Today, we have the strange circumstance in which capital gains are taxed at a lower rate than wages and salaries. The maximum rate for capital gains is 20%. Income tax rates range from 28% to 39.6%, although they will ratchet down under President Bush’s 10-year tax cut. On a purely objective basis, it seems absurd to me that our labors should be more heavily taxed than gains from playing the market. I mean, why do accountants, mechanics and the rest of us owe more of our livelihoods than trust fund babies and others who live off investments?

This raises many questions of fairness. But for the moment, let’s acknowledge that reigning economists believe a break on capital gains is necessary to encourage investment. So that is where we start.

Where we should end up is with a system that taxes short-term gains at punishing rates. The tax code already rewards those who hold their investments for five years, but the differential is hardly enough.

Rates on short-term capital gains should be increased many-fold. And that includes trades made by mutual funds. (Remember, high-bracket tax rates topped 90% in the good old days of the 1950s.) Correspondingly, rates could then be lowered on longer-term investments, if that’s really what’s needed to keep business and investors prospering.

This trade-off would not do much to slow down a run on stocks as occurred after Sept. 11. But once markets stabilized, a sizable tax advantage for long-term holdings would discourage investors who have only the moment in mind. Look at the damage they already have done by forcing businesses to reduce their horizons, to look no further than the next quarterly growth or earnings statements. This is what has made our markets, and our businesses, nervous wrecks.

Rather than try to weather a slump, or even a bump, businesses slash employees, cut research--anything that may satisfy investors before the day’s closing bell. An across-the-board reduction in capital gains tax rates would only make things worse. Our markets, after all, are not driven by “laws of economics” but by simple herd psychology. And these days, the short-term profiteers, the margin players, the day traders and the mighty mutual funds are at the head of the pack. They should be given a cold bucket of water in the face, not a tax break.

Particularly in bad times, most of us would be better off, and the country surely would, if business executives and investors had more room to look down the road and think about tomorrow.

Would there be downsides? Yes. Risky start-up businesses, for one thing, would find it harder to raise capital, but look where the easy capital of the technology boom-bust got us.

Poorly managed and lethargic companies would survive longer, but time would catch up with them eventually. The big board would never again be quite so exciting. All small sacrifices.

The end result would be far more tranquil markets and a return to the old-fashioned purpose of stocks: not to make a killing today but to invest in the business of our country for the sake of the future.

Comrades, thank you; God bless America and please lift your eyes to the flag.