Washington Memo: 1972
The politics of taxes
What’s going to happen to taxes next year? Something, most likely, but at this point no one can be sure just what — no matter who wins the November election. After Senator McGovern’s celebrated plan to grant every American $I,000 a year went off the road, he traded it in for a set of remarkably specific tax reform proposals. But if he is elected, no one can predict how many of them — if any —could get through Congress. President Nixon has also shifted ground. He has backed away from the value added tax, a kind of national sales tax that excited his advisers for a time, and now promises $16 billion in federal subsidies to cut residential property taxes in half — without any corresponding increase in federal taxation. Nixon has not said where the money would come from.
McGovern has a similar plan, which he says would reduce local property taxes by one-third. He promises to raise the money by reducing military waste and closing tax loopholes.
McGovern’s broader tax reform program grows out of the populist share-the-wealth discontent that he and George Wallace of Alabama exploited during the Democratic primaries. McGovern says that his plan would net $22 billion a year by 1975, just over half from the rich and the rest from corporations. Capital gains would be taxed as ordinary income, not at lower rates as they are now. Estates would be taxed more heavily, with exemptions for property left to a spouse and for estates of an unspecified “moderate” size. Tax shelters — real estate, oil and gas exploration, municipal bonds, gentleman farming and the like — would be cut back or eliminated. In addition, McGovern would cut down various corporate tax incentives. Apparently as a conciliatory gesture to the wealthy, he also proposed dropping the top individual income tax bracket from 70% to 48% — though few actually pay at the 70% rate.
One Nixon aide says that McGovern’s spending proposals, combined with his tax reforms, would leave a McGovern administration $100 billion short in its first budget. A budget based on McGovern’s campaign promises would doubtless be out of balance, though probably not that badly. But Nixon’s proposed property tax subsidy could only add to the already massive federal deficits his own administration has generated.
Treasury Secretary Shultz argues that McGovern’s suggested change in the treatment of capital gains would be “almost confiscatory.” Shultz contends that a study of common stocks over the past 15 years shows that about 40% of capital gains represented inflation rather than any real increase in value. At McGovern’s proposed top tax rate of 48%, says Shultz, the effective tax on real capital gains would be much higher. Example: a $1,000 capital gain in stocks over 15 years would be a real increase of only $600. But the tax would be $480 — 80% of the real increase.
$55,000 a year on Social Security
If you are 35 years old, married and making $9,000 or more this year, the amount of your Social Security pension at age 65 may surprise you: it will be about $20,000 the first year. If you are 22, you and your wife at 65 will probably get almost $38,000.
It all seems rather astounding, since the Social Security maximum for most of 1972 was $4,662. A bill enacted this summer, however, ties Social Security payments for the first time to increases in wages and the cost of living. The estimates above assume annual increases of 2.75% in prices and 5% in wages. In 1972 dollars, the pension at 65 for today’s married 35-year-old would be $8,865; for a married man now 22 it would be $11,772. The younger man gets more, even in constant dollars, because his real lifetime earnings will be higher, assuming wages indeed rise faster than prices.
The increases keep piling up in the years after retirement. Today’s 35-year- old—whose benefits at 65 will be $20,000 in the dollars of the year 2002 — will be getting nearly $28,000 at 78. When the man who is now 22 reaches age 78, he will receive more than $55,000 a year — still assuming annual increases of 2.75% in prices and 5% in wages. That very fat pension naturally presumes a much thinner dollar.
None of this largesse, of course, is free, and there is one more condition: you must continue to make at least as much as the Social Security wage base. You and your employer each now pay a 5.2% Social Security tax on the first $9,000 of your wages. Next year the tax goes up to 5.5% and the wage base to $10,800; in 1974 the base rises again to $12,000. After that, unless Congress intervenes, both the wage base and the benefits will go up with the cost of living. The tax rate will be 5.6% after 1985 and 5.7% after 1992.
Disclosure marches on
By order of the Federal Trade Commission, light bulb packages must carry the bulb’s output and life span. Clothing labels must give detailed cleaning and drying instructions. Most sweepstakes advertisements have to state the odds against winning, and cigarette ads must prominently display a health warning. The FTC is now preparing to apply its affirmative-disclosure doctrine much more widely. The agency contends that price tags and other product labels are often deceptively incomplete because they fail to disclose product durability, operating and repair costs, and possible hazards.
The accelerated program is still being planned, so FTC officials emphasize that future targets have yet to be chosen. Among the hypothetical possibilities they suggest: including average service costs on auto price stickers and putting power consumption data on air conditioners, some of which use electricity more wastefully than others. “The consumer lacks essential data like this on virtually all hard goods,” says one top FTC official. “He cannot get the information on his own, and he cannot make an intelligent buying decision without it. Disclosure is needed to make the competitive marketplace function efficiently.”
Nationalizing the market
Those moving electronic tapes on the wall of your broker’s office list sales and prices on the New York and American stock exchanges separately. At the same time, many of the same stocks are also being traded on regional exchanges around the country, and over the counter. General Motors, for example, is listed on the New York, Midwest, Detroit, Pacific Coast and Philadelphia-Baltimore-Washington exchanges and sold by over-the-counter dealers. At a given
moment GM’s price may be lower on, say, the Detroit exchange than on the Big Board, but you have no way of knowing without a spot check. An over-the- counter dealer may be negotiating yet a different price; that information is not available to the investor.
All that will change, probably next year. To help make a truly national market in stocks, the Securities and Exchange Commission plans to require a “composite-tape” system. Details are not yet clear, but your broker will probably use three electronic tapes. Two would handle stocks listed on the New York exchange and would include all transactions involving those stocks, whether the sale was made through the Big Board, a regional exchange or over the counter. The third tape would handle stocks listed on the Amex, again listing all transactions wherever made, and would also include stocks listed only regionally. Newspaper stock listings would be similarly broadened. The NYSE table would cover volume and prices of Big Board-listed stocks wherever sold. The Amex table would work the same way.
The composite tape would, of course, record past transactions, which do not always reflect current price offerings. The SEC wants investors to have that information, too. It envisions a system whereby your broker, told to buy 100 shares of GM, could push a button and get instant price quotations from every exchange and every over-the- counter dealer. As your agent, he would then buy from the cheapest outlet.
Institutions and other big investors have long price-shopped among exchanges and dealers. Occasionally the price of a stock varies enough for arbitrage-buying a stock on one exchange and immediately selling at a higher price on another. But neither price-shopping nor arbitrage has been available to the average investor. The SEC plan should largely eliminate arbitrage and give all investors the shopping information now reserved for a select few. — W.B.M.