October 16, 2019

High & Low Finance: Investment Income Hasn’t Always Had Tax Advantages

Whatever happened to “unearned income”?

That used to be the normal term for income from investments — dividends, interest and capital gains.

For some, that term produced images of “coupon clippers,” another term you don’t hear much anymore. The coupons in question were not the kind that get you 25 cents off on Jell-O at the grocery store. They were the ones that came attached to bonds in a precomputer age. To get your interest payment every six months, you literally had to clip off the coupon and take it to your bank.

More than half a century ago, when President Dwight D. Eisenhower proposed taxing dividends at lower rates than wages, Representative John W. McCormack, a Massachusetts Democrat who later was to become speaker of the House, was outraged.

“The Republican tax bill is indefensible in that portion which gives great benefits to corporations and constitutes a bonanza to stockholders, the larger ones in particular,” he said in 1954. “It is unjust and in my opinion morally wrong to make a person with earned income pay considerably more in taxes than persons with unearned income from dividends.”

That tax fight ended with a benefit for small shareholders, who would escape tax on the first $50 a year of dividends. But annual dividends above that amount remained fully taxable at ordinary income tax rates, which ranged up to 91 percent. Mr. Eisenhower’s proposal to cut the rates on such payouts was rejected.

Not until 2003 were dividend tax rates reduced below ordinary income tax rates. Then they were cut to 15 percent, the same as the capital gains rate.

For most of the history of income taxes in America, long-term capital gains — defined at different times as investments held for minimum periods of as little as six months and as long as 10 years — have been taxed at substantially lower rates than top ordinary income tax rates.

There was, in fact, only one time that capital gains were taxed at the same rates that were paid by people who earned their money by working. That was during the years 1988 to 1990, as a result of the Tax Reform Act of 1986 — a law championed by President Ronald Reagan.

To be sure, he changed his mind about unearned income in 1988. After Vice President George H. W. Bush, then campaigning to succeed Mr. Reagan, endorsed lowering capital gains taxes, the president allowed that might be a good idea. Mr. Bush and the Congress did lower them after he was elected.

These days, the conventional way to look at taxes on investments is to think they should be low to stimulate investment and thus help the economy. It is a view that has much more support in economic theory than in economic history.

Correlation is not causation, of course, but the economy has tended to do the best when taxes on unearned income were high. Economic growth was great during the 1950s, when dividends were taxed at very high levels and capital gains rates were 25 percent, much higher than they are now. Since 2003, tax rates on unearned income have been at their lowest levels ever, and economic growth has been sluggish.

Tax rates are not the reason for that, at least not directly. But it could be argued that low tax receipts now are having a pernicious impact, particularly on state and local governments. Their layoffs have been a drag on the recovery, and the declining quality of infrastructure in many areas has hurt many businesses. If the federal government taxed unearned income anywhere close to historical averages, there could have been a lot more tax money available to help out when the credit crisis hit.

There is no question that tax policy has had a major impact on investment, but its impact probably has been less in the overall level than in the allocation of investments.

Corporate profits, at least theoretically, are taxed twice, once when the company earns them and again when shareholders are taxed on their dividend payments. But interest payments to bondholders are deductible to the corporation, unlike the dividends it pays to shareholders. As a result, there has been an incentive to finance companies with as much debt, and as little equity, as possible. That maximizes return on equity in good times, and allows companies to plausibly claim they will raise profits much more rapidly than sales. But it also makes bankruptcies more likely when the economy falters. The Eisenhower tax policy that outraged Representative McCormack was intended to reduce that incentive a little, by reducing slightly the rates on dividend income. Had it passed, it probably would have had little impact.

Article source: http://feeds.nytimes.com/click.phdo?i=15211d32b2d96fbce8ecbc74fb295833

New Fuel Economy Rules Win Broad Support

But now that the standards have been proposed, nearly everyone involved in the process is on board with the results, as a public hearing held Tuesday in Detroit showed.

More than 90 people who spoke throughout the day asserted that the stricter fuel economy requirements would create jobs, reduce oil consumption, create cleaner air and save drivers money, all while helping automakers increase their profits.

“We’re celebrating something that has taken a long time to reach,” said Representative John D. Dingell, a Michigan Democrat who helped quash previous efforts to impose higher mileage standards. “There appears to be no significant opposition amongst responsible persons.”

The National Automobile Dealers Association, however, did speak out against the idea of setting requirements for vehicles made more than a decade from now until more is known about the strength of consumer demand for more fuel-efficient vehicles.

Don Chalmers, a Ford dealer in New Mexico and the group’s government relations chairman, said he worried that vehicles would become too expensive for some consumers to afford. “Before rushing headlong into a set of new mandates aimed at doubling today’s fleet fuel economy, we need to understand better the potential ramifications,” Mr. Chalmers said. “If our customers do not purchase these products, we all lose.”

The proposed new standards call for automakers to increase the average, unadjusted fuel-economy rating of their vehicles to 54.5 miles per gallon by 2025, up from about 27 miles per gallon today. Because of the way testing is done, the 2025 requirement correlates to a window-sticker rating of about 36 miles per gallon, according to the automotive information Web site Edmunds.com, or roughly what Toyota’s tiny new Scion iQ car achieves today.

Additional hearings on the standards will take place Thursday in Philadelphia and Jan. 24 in San Francisco. The Obama administration this month extended the public comment period for the proposal by two weeks, to Feb. 13, and expects to finalize the regulations this summer.

The administration says the higher standards will cause vehicle prices to increase about $2,000 but that owners will save an average of $6,600 over the life of the vehicle by using less fuel. The rules also will create 484,000 jobs and cut oil consumption in the United States by 1.5 million barrels a day by 2030, according to the Go60mpg coalition, an association of environmental advocacy groups that support the proposal.

Mr. Chalmers said the government’s analysis greatly underestimates how much the rules will cause vehicle prices to rise. He said the actual increase could be up to $5,000, causing an average buyer’s monthly payments to go up by $60 or $70 and potentially locking out shoppers who would not be able to obtain financing for the higher price, regardless of their fuel savings later on.

Some individual dealers disagreed, though, and said they welcomed the new requirements.

“Our customers strongly desire more fuel-efficient vehicles,” said Doug Fox, who has five dealerships in Ann Arbor, Mich., selling Nissan, Hyundai and other brands. “Everyone seems to win on this deal.”

Michael Robinson, vice president for sustainability and regulatory affairs at General Motors, said the company probably would submit recommendations for some technical changes and clarifications to the rules, noting that the proposal is 1,000 pages long. But G.M. is “over all, very satisfied” with the standards, he told reporters.

“We are on a good path toward meeting the early requirements that this proposal will create,” Mr. Robinson said during the hearing. “But we will need further breakthroughs in technology and good customer acceptance of the additional vehicle changes, technologies and costs that will be associated with providing the vehicles needed in future years to allow us continued success in meeting the aggressive requirements down the road.”

G.M., the Ford Motor Company, Chrysler, and other automakers agreed last summer to support the framework of the higher standards.

The Alliance of Automobile Manufacturers, a trade group, said all of its members supported the standards through 2016, when they would be required to achieve 36 miles per gallon. The German carmakers Volkswagen and Daimler have not endorsed the requirements past that point.

The president of the United Automobile Workers union, Bob King, said he supported increasing the fuel economy of vehicles because it would create jobs and better protect the jobs of current workers by helping the industry thrive.

“The proposed rules are sensible, achievable and needed,” Mr. King said. “They are good for the auto industry and its workers, good for the broader economy, good for the environment and good for our national security.”

Article source: http://feeds.nytimes.com/click.phdo?i=6eb2283c2adc0909f44cb74cfb354f26