Tabell’s Market Letter – November 30, 1984

———- TABELL'S MARKET LETTER 909 STATE ROAD, PRINCETON, NEW JERSEY 08540 MEMBER NEW YORK STOCK EXCHANGE, INC MEMBER NATIONAL ASSOCIATION OF SECURITIES DEALERS. INC (609) 9249660 -,.. November 30, 1984 – The.-(e9tureor'Hleeek'sfina.n.ciarn-ewsas the- -Treasury taxreformproposal–ana'-t1ie Iffipres-io-n—- – – gained from the published response thereto was that it turned out to be a monumental lead balloon, pos- sibly because almost everybody's pet ox appeared to be gored somewhere in the process. This was curi- oue, since the tax reform impetus is hardly new. The President made it a keystone for his campaign, bills bearing the imprimatur of both political parties (Kemp-Kasten and Bradley-Gephardt) have been around for Borne time, and the Treasury study is simply a more detailed synthesis with the same thrust. In light of the cool reaction, one wonders why reform has gained as much momentum as it has. The reason is summarized in the first paragraph of the Treasury proposal. The present U.S. tax system desparately needs simplification and reform. It is too complicated, it is unfair, and it retards savings, investment, and economic growth. Essentially, one either believes that statement or one doesn't. We tend to believe it. Reduced to their essence, current proposals can be viewed as a practical triumph for one of the basic tenets of supply-side economics. That tenet stresses the economic disincentives of high marginal tax rat es, and the unifying tiane of all existing reform proposals is that those rates are reduced — to a 35 personal maximum in the Treasury offering, lower in Bradley-Gephardt and Kemp-Kasten. The fundamental distinction that needs to be made in understanding the proposals is between average and marginal tax rates. Since the proposals are theoretically IIrevenue-neutral. the average percentage of total Income paid for a given tax-paying entity will change hardly at all. This legerdemain is accompli- shed by eliminating a mare's nest of former deductions and taxing the resultant higher income at a lower rate. The resuit Is that the potential value of an additional dollar of income earned is, due to that lower rate. increased. Now, revenue-neutral is a totally theoretical concept. It means that if the proposed changes were applied to the existing Income structure, total tax revenues would remain the same. The point is that, once a change is enacted economic decisions, are made on the basis of that change. An additional dollar of income under the Treasury proposal will be worth 65, 30 more than it is worth under current law and 116 more than it was worth a few years ago when a 70 marginal rate existed. IEleme,n;;t;ary.;eco– –T\nom1cs–nms us thBtsucn an -mcentive favors …tnecreation ofaaaitiOiliiltncome or,-'in'other words, eco- nomic growth. The basic argument in favor of reform is. really. no more complicated than that. Many of the specifics of the proposed legislation, especially those that relate, directly or indirectly, to the stock market can be understood in terms of incentives. The basic corporate tax rate is like that for individuals, reduced sharply from 46 to 33. As an offset, the Investment Tax Credit and the Ac- celerated Cost Recovery System, two of the most conspicuous economic miscarriages of current tax legis- lation J are removed. These were originally band aid proposals to compensate business for its inability to recover replacement costs of assets in an inflationary environment. The economic life of an asset, how…. ever, cannot be fixed by legislation. In practice both ACRS and ITC have simply turned out to be sub- sidies to those businesses investing heavily in capital equipment. The effect has been to make such in- vestment f in many cases , a tax decision rather than an economic decision. It is the restoration of eco,, nomic incentives that is the thrust of reform proposals. Other features of direct concern to investors are the taxation of capital gains at (lower) ordinary in- come rates and, perhaps, more important, the partial deductabllity to corporations of dividend payments, a step, at least, In the direction of eliminating the Ion g-established double taxation of the corporate In- come stream. This Is a direction which we have long approved. It has always been our feeling that capital investment decisions should be subject to the discipline of the market place. Current tax law has always provided an incentive for corporate reinvestment in decaying industries. The proposed changes would tend to force more income into the hands of investors who could then make their own decisions regarding reinvestment rather than having those decisions made for them by corporate management. It has been argued (see George Gilder on the op-ed page of today's Wall Street Journal) that placing the same economic value on a dollar of interest or dividend income and a dollar of capital gain will be a deterrent to investment in smaller companies where rewards J traditionally have been reaped in the latter form. We are not so sure that this is the case. It seems to us that an incentive for venture capital in- vestment has always been in the potential size of the returns rather than their nature. That potential, it seems to us, will remain. We have presented above arguments in favor of tax simplification simply by way of indicating our be- lief that some species of reform, however altered in the political process is likely to be implemented, de- spite the anguished howls that emerged from all sides this week. As that implementation becomes closer, investment decisions are, quite obviously. going to have to be made in this light. Overall. however. we believe reform will improve. rather than c1oud,the investment climate. AWTrs ANTHONY W. TAB ELL DELAFIELD, HARVEY, TAB ELL INC. Dow-Jones Industrials (12 00 p.m.) 1190.81 S & P Composite (1200 p.m.) 163.84 CumUlative Index (11/29/84) 2053.61 No statement or expression 01 opinion or any other malter herein contained IS or IS to be deemed to be, directly or Indirectly, M offer or the soliCitation of an offer to buy or sell any secunty referred to or mentioned The mailer IS presented merely for the convenlenceoi theubscnber While we beheve the soorces of oor information to be reliable we in no way represent orguarantel'! the ilccuracy Ihereol nor of the corporallon and Its of/lcers statements made herein 01 employees, may now Any have action to be taken or may later lake, by the subscriber Should be positions or lrades In respe based on hiS own Investigation ctlo any seculltles mentioned I nanthdiSInofroarnmylfIuotnureDeIslasfuieeldnHdasrvuecyh lPaObSeitliionInmc different from any views now or h!lIealter e.opressed In thiS or any other Issue Delafield Harvey Tabell Inc which IS registered With tile SECas an Investment adVisory and other customers Independently 01 any statements made In thiS 01 In any ottler Issue Further InformatIOn on any secunty Investment mentioned haedrelisnorImavaayilgaibveleaodnvlrceqeutOett S