EARTH TO BUSH: IT'S CAPITAL GAINS, NOT DIVIDENDS!
By Mark Scheinbaum
columnist
President Bush's proposal to cut or eliminate taxation on common stock
dividends is a positive move toward overall tax reform. Yet, it pales in
comparison for the need for a genuine, significant reduction--or
elimination--of the tax on capital gains.
Much has been written about the major industrialized nations that have
eliminated dividend taxes, but it is the United States which steadfastly
holds to an archaic, counter-productive gains tax policy.
Look at it this way: the fence in the front yard has been ragged and
worn for years, to the point of being unattractive and useless as a security
measure. Suddenly a broken water pipe has flooded your street. You decide to
rush out with a grandiose flourish and let the neighbors know that you have
chosen this moment to replace the fence. Everyone else is sandbagging their
front door, and getting water pumps to protect their entire property.
The impending flood is the global competition for investment dollars,
from savvy institutions and individuals. Which environment for their money
creates the type of confidence down the road which the locals (U.S.
investors) will want to embrace as well?
As the system now works, U.S. investors are penalized for following the
Judeo-Christian teachings of Mom and Dad: "Save your money for a rainy day.
Put away money for long-term, investment grade growth, so you have something
in your old age."
If U.S. residents own a $10,000 bank Certificate of Deposit paying 3 per
cent for year and never take out a penny, but simply roll it over year after
year, they receive a gift each January. That "gift" is a Federal 1099 Form
and a tax bill.
Similarly, many mutual fund investors received the investment equivalent
of "sticker shock" in recent years. Their nest eggs were clobbered by a
declining equity market, but the January surprise arrived in the form of a
bill for the capital gains tax due on funds which actually lost money. Dollar
cost average, keep adding to your investments, reinvest dividends and
gains--if any--and never, ever, take any beneficial use of the money until
you need it, and your reward is a tax penalty.
Investors who are reinvesting long-term should be allowed to compound the
results tax-deferred. This is wealth-building for the middle class. This
encourages withdrawals for consumer items in good years. This reduces
consumer and credit card debt, and builds investment grade credit ratings.
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