Where Does the Money GO? February 14, 2002February 21, 2017 Tony Spina: ‘Three months ago I sent an e-mail to you saying that I didn’t see it as important who the Government rebates tax money to because it all ends up in the “economy” somewhere. Your reply then, and your writings since then, have been consistent with a position that it does matter who touches the money first. Someday when you are stuck for something to write about, a description would be interesting of how it is better for the economy when we give back some of Sam’s & Sally’s Sub Shop’s tax money to them so they can buy an IBM PC for their business, instead of sending back some of IBM’s tax money to IBM so their employees can continue to buy lunches at Sam’s & Sally’s.’ ☞ Is that what IBM would do with the $1.4 billion the Republicans proposed to send it back in retroactive tax-rebates? Give it to their employees to buy lunch? Something tells me: no . . . and that IBM employees can already afford lunch. But you raise an interesting question: What happens if IBM gets the $1.4 billion retroactive tax-rebate instead of, say, using the same money to give $1,000 to each of 1.4 million small businesses like Sam & Sally’s that could each buy a PC with the money? Without the rebate, Sam & Sally might not be able to get that computer and improve the productivity of their business. And without their being able to buy that computer, IBM would have one fewer PC to make and sell. Multiply that 1.4 million times. But at least IBM would get the $1.4 billion, even if Sam and Sally had to do without, so what would they do with it? Would IBM recall laid-off workers? No. (They didn’t lay them off for lack of cash; they have tons of cash. They laid them off for lack of orders.) Would IBM decide to buy a new fleet of cars for its sales force and stimulate the economy that way? (No, if IBM thought it needed $1.4 billion of new cars, it has plenty of money to buy them and would have done so already.) So where would the money go? That’s a harder question . . . maybe into Treasury securities bought from some Japanese bank that’s selling them – who knows? In one sense, it may be true that pumping more money into the economy will help the economy no matter who gets to own that money . . . but I think it does matter who touches it first. And I think it definitely matters who ‘owns’ the money. Look at it this way: What if the entire tax break went just to Bill Gates? He doesn’t need it, but he wouldn’t burn it, either. He’d buy stocks and bonds or small countries with it, and then the sellers would have that money. So the money wouldn’t disappear . . . but is this a good idea? And the best way to stimulate the economy? When reduced to this absurd extreme, the answer is obvious. When, instead, you imagine spreading the bulk of the tax break around to, say, 25 wealthy families and corporations instead of just one, it’s a little less obvious but, I think, still pretty clear. It becomes less clear – but, I would argue, still no mystery – when you spread the bulk of the tax break around not just to Bill Gates, or even to 25 wealthy families and corporations, but to 100 large corporations, say, and to the top 1% of individual taxpayers. Which is what the Republicans have done. To me, this is just bad policy: unfair and unlikely to stimulate the economy nearly as well as a different approach would. But if the 1.4 million Sam & Sally Sub Shops of the world say ‘No! Don’t give us $1,000 each, give IBM that $1.4 billion instead (even though they don’t need it)’ – so be it. If the elderly around the country say, ‘No! Don’t give us a prescription drug benefit, use that money to cut the estate tax on $1 billion estates from the current 55% to 0%’ – so be it. Who am I to argue with the popular will? I don’t think this is how most people would feel, if presented the choices clearly, but you never know. PS – Happy Valentine’s Day!
Boref & Noble February 13, 2002February 21, 2017 Margaret Conomos: ‘I heard you speak at Barnes & Noble in DC recently. I advised my mother to buy 200 shares of Borealis based on your recommendation. It was about $5.35 then, last time I looked it was $3.80. Any advice? Why is it dropping? Hold? Sell?’ ☞ Several things to say about this. First, I always make clear that the stock will likely go to zero, and that you should only buy a few shares if you really, really don’t care if it goes to zero. Because it probably will. Second, last time I looked, Borealis (bulletin board symbol BOREF) had traded at $3.25. (The bid and ask are at $3.25 and $4.10.) So it’s even worse than you thought! At this rate, it should be zero by the end of the month! Third, I know of no good reason for people to be selling – which of course doesn’t necessarily mean they don’t have a good reason. But this may be the kind of stock people go into hoping for a quick killing; then lose patience with and sell. So it rises on good news, then falls back as people grow impatient for results. I just look at the preposterous claims on the Borealis web site and imagine that if even one of them were true, the company would be worth an easy $1 billion. That’s 50 times what it’s selling for today – which is reason enough to write this stock off as preposterous. Except that then I look at the Beckett and Boeing press releases and I wonder: why would they be party to something preposterous? Might there – conceivably – be something here? That simple reasoning has not changed since I was hawking my book at Barnes & Noble, so I would not sell the stock. It will either be zero one day or else . . . well, you pick the astronomical number. I’m hoping for the latter, but expecting the former. (While at Barnes & Noble buying my book – surely a more sensible gift than roses – be sure to stop by the Café and try a few varieties of iced Honest Tea!) Joe Cherner: ‘If you had $70 billion, would you rather buy Dell OR buy Sony and have $30 billion left over to throw me a party?’ ☞ If that’s how I had to spend the $30 billion, I would buy Dell. Otherwise, I’d go for Sony and the cash. Kenny: ‘Why don’t the pundits, experts, advisors advocate a pure indexed philosophy of indexing versus all the other nonsense out there.’ ☞ There’s no money in pushing index funds. Many financial writers like me, and finance professors, do advocate them. Our livelihoods don’t depend on what we recommend, so we can comfortably push what we think is best for you, not worry whether it’s also best for us. The least-promoted alternatives often provide the best value. Also, of course, it stands to reason that if you really do your homework and are very, very smart, you may actually find stocks the market has ‘mispriced’ – see yesterday’s column on shorting Enron – and beat the market that way. Almost none of the mutual funds do so with any consistency, so you’re best off going with the low-expense index fund. But people like to dream (and the marketing departments of actively-managed funds like to encourage those dreams). Finally, if EVERYONE indexed, then the market would become grossly inefficient and mispricings would abound. But we are a long way away from a time (and will never get to a time) when everyone indexes, when no one tries to discern value, and when, thus, ‘mispricings,’ ripe for easy picking, hang low from every tree. There clearly was such a mispricing with Enron. If I’m incredibly lucky, hindsight may show that Borealis was mispriced as well. If not, I will have enjoyed the dream. A bit like Sidney Greenstreet at the end of The Maltese Falcon.
The Pro Who Shorted Enron February 12, 2002February 21, 2017 Click here. It’s the Enron testimony of my friend Jim Chanos. I commend it to you on several levels. First, it gives you some sense of what security analysis should really be like – the homework, expertise, integrity and critical thinking required (that few of us – and few mutual fund managers or Wall Street analysts, for that matter, can bring to bear). Second, it gives you a sense of how prudent short-sellers operate (and why they aren’t black hats). Third, it raises some important suggestions for reform. Oh – and, fourth, it helps explain at least some of what Enron was doing.
More Long-Term Care Insurance February 11, 2002January 25, 2017 WHEN SHUFFLEBOARD IS NO LONGER AN OPTION – PART 2 Thursday, I wrote a word or two about what people think of as ‘nursing-home insurance.’ Today I realized that one of the many clippings I’ve been carrying around, meaning to write about, is Jonathan Clements’ recent excellent analysis in the Wall Street Journal. Basically, he makes the point that if you’re poor you don’t need this coverage (you’ll qualify for Medicaid) and if you’re rich you don’t need it (why pay someone else to take a risk you can afford to take yourself?) and if you’re in between, you should consider two things (well, more than two things, but these among them): First, that you should not buy more coverage than you need. If the local nursing home costs $60,000 (in his example), you may need to buy only $15,000 of coverage, because Social Security might provide $25,000 a year and you might have a $20,000 annual income from other investments or a retirement plan . . . leaving (in this example) just $15,000 a year to make up with insurance. Second, that you can cut your premium sharply by accepting a one-year deductible – meaning that you agree to pay for the first year entirely by yourself. This makes sense, if you can afford to do it, on the same premise: why pay someone else to take a risk you can afford yourself? Mike Gavaghan: ‘Your readers looking for more information on long term care insurance can also ‘Ask Less.’ [Click on him to the left of the previous paragraph.] That’s exactly what I did over the summer and ended up getting policies for my wife and me through State Farm. As you said, the premiums are pretty steep, and I’m not yet convinced the coverage reaches the same level of importance as, say, disability and life insurance. But, I also decided that I don’t need enough coverage to cover all of my potential long term care costs. I only got enough coverage to merely subsidize my likely long-term care expenses and minimize how much I’d need to take from the nest egg. ‘The MostChoice.com website was a good read. I seem to fit the profile of the sort of person they’d recommend long term care insurance to – except for age. When we bought the policies, I was 30 and my wife 38. Maybe we’re too young and too far away from senility to justify getting the coverage now [yes, I think so – A.T.], but we’re still at risk for crippling illnesses and injuries. If I got hurt, my disability insurance would help my wife cover the living expenses we already incur, and my health insurance would pay medical bills. But, there are a lot of other expenses that wouldn’t otherwise be covered like home nurses and hospices. ‘I’m likely to cancel the policy in a few decades. If I can build a sizeable enough nest egg, I won’t need the coverage. But, for today, I’m just trying to insure against a loss I’m not able to absorb easily.’ AND SPEAKING OF HEALTH CONCERNS Tim Couch: ‘Have you seen the cartoon in the New Yorker? Two Afghan soldiers sitting around, one says ‘If you still want to belong to an organization dedicated to killing Americans, there’s always the tobacco lobby.” ☞ The good news for the tobacco lobby is that the current administration has dialed way back on previous efforts to annoy the industry, and is in fact helping it to sell more of its fine product to our friends in foreign lands. MORE PRIORTIES . . . Michael Young: ‘The Bush administration has proposed cutbacks on Internet access subsidies designed to bridge the ‘digital divide.’ Gotta make room for those tax cuts for the wealthy.’
Rolling Down the Yield Curve February 8, 2002February 21, 2017 David Smith: ‘Check out this very good article by Bill Gross of PIMCO about long-term trends.’ ☞ Bill Gross is so smart! I got to interview him for a PBS series years ago, and he just blew me away. Here’s what I wrote about him in this space on December 11, 1997: Bill Gross manages $90 billion or so in bonds, which has to be really boring until you realize that he somehow manages to squeeze an extra 1% return out of his portfolio year after year-an extra $900 million. But the image that impressed me even more, as we looked from his Laguna Beach living room out over the Pacific, was of a 53-year-old man determined to live to 100, getting it into his mind to run from Carmel to the Golden Gate Bridge-five back-to-back marathons over five successive days. On the last day of this run, his kidney ruptured. Blood was running down his leg. But he hadn’t reached the bridge, so he kept running. Only when he finished did he allow the ambulance to whisk him away. It may be worth noting that if you try to beat the markets, you’re competing with guys like Bill Gross. (If your 401(k) offers a bond fund managed by PIMCO, it could warrant serious consideration.) Those who don’t live and breathe yield curves may find his article – though deft and colorful – hard fully to follow. But that’s OK. If nothing else, it will give you a sense of the complexity of the markets and the difficulty of steering our economic ship. A ZERO PERCENT TAX ON CERTAIN CAPITAL GAINS? Several of you raised good and interesting objections to last week’s idea of a zero percent tax on capital gains realized from the purchase of newly issued securities. I hope to get around to presenting those objections, but in the meantime just wanted to note that my idea did not meet with universal applause. (I still like it, but your objections are very much worth discussion.) AND SPEAKING OF LIVELY DEBATE Tim Galpin: ‘Thank you for including the link on 4 Feb. to Mr. Clinton’s comments in the BBC forum. I confess to being generally predisposed to disagree with his politics and I might not have otherwise seen it.’ ☞ Thanks, Tim. Few things are as impressive as an open mind.
From Lithuania to Long-Term Care Insurance February 7, 2002February 21, 2017 YOU HAD A TRAIN? Along the lines of Monday‘s ‘count your blessings’ column, I had lunch a day or two ago with my friend Meyer Berman, an investor of considerable renown and generosity – and earthiness – who tends to get sentimental about his good fortune and his great country. He told me the story of how he found himself chatting with Henry Kissinger (‘he’s a very funny man!’) at a White House party a few years ago. Meyer mused to Kissinger, ‘How did we get here? I grew up in a little town in Lithuania, no electricity, no running water, no cars or faxes . . . outhouses . . . every two weeks a train would go thru and toot its horn.’ To which Kissinger replied, in mock wonder: ‘You had a train?’ YOU CAN SAY DIE, BUT NEVER SAY ‘SELL’ If you missed the PBS’s Frontline ‘Dot-Con’ documentary, Pieter Lessing suggests you click here for the transcript of an illuminating interview with one of Wall Street’s high-priced analysts. I hate to encourage cynicism, but it’s important to understand that – despite their reassuring advertising – financial firms are not always completely on your side. The analysis that full-service brokerage firms provide their clients might sometimes instead be called dis-service. WHEN SHUFFLEBOARD IS NO LONGER AN OPTION Vine Crandall: ‘How about your thoughts on long-term care insurance?’ ☞ I haven’t bought it myself, because I’d rather save up a big bundle in my retirement plan and use that, if need be. If you can’t save a big bundle, and want the peace of mind, you may have to consider this – although, clearly (unless you know something the insurance company doesn’t), the odds are not in your favor. I.e., you’re paying enough to cover all the insurer’s considerable marketing and administrative expenses, plus – if they’ve done the math better than you – a decent profit to boot. Nothing wrong with that; it’s just a better way for insurance-company shareholders than for insurance-company customers to prosper. As to the specifics of what to watch out for in choosing a company and a long-term care policy, I’m no expert. But here is a site you may find quite informative. It even lets you compare offerings. CHECK IT OUT Ethan Pien: ‘Here’s a cool site worth a look: consumersearch.com.’
Priorities: YOU Decide February 6, 2002February 21, 2017 The Miami Herald January 27, 2002 FLORIDA SLASHING CARE FOR DRUG ADDICTS By Carol Marbin Miller In a state where nearly a third of all crimes are drug-related, the Department of Corrections has approved a budget cut that will eliminate the bulk of drug treatment among inmates and greatly reduce the state’s program to help drug addicts outside the prison system. The cuts – expected to save Florida taxpayers $13 million this fiscal year – will eliminate in-house drug treatment programs at all but four of Florida’s 55 major prisons . . . [and] reduce by 34% the number of beds available to treat drug addicts at 20 residential treatment programs throughout the state. Say you were the governor of Florida, which has no state income tax. Would you cut sales taxes, which everyone pays? You certainly would not! Would you cut property taxes, which most average Floridians pay? You certainly would not! Would you cut classroom sizes, to try to give elementary school kids the best possible start in life? You certainly would not! No, you’d look at the state’s many problems and challenges, weigh your priorities, and cut taxes on the rich. Listen: you can’t do everything, so you do the most important thing. That’s what Jeb Bush seems to have concluded as Governor of Florida, and that’s what his older brother seems to have concluded as President of the United States. Soon after he took office, Jeb cut the Intangible Property Tax in half. Where Floridians with multi-million-dollar stock and bond portfolios had long had to fork over two-tenths of one percent of the total each year, now they fork over just one-tenth of one percent – a 50% cut. (In fairness, some loopholes were apparently tightened to make it harder to avoid the tax.* Then again, the tax is even less onerous than it sounds – if it sounds at all onerous – because U.S. Treasury securities, Florida municipal bonds, and retirement nest eggs are all exempted from the calculation, and because any tax that is paid becomes a deduction against your federal income tax.) Another way to have reduced this tax burden would have been to greatly increase the exempt amount for everyone. With a higher threshold, almost no one would have had to pay it – cutting down on paperwork for a lot of taxpayers and Tallahassee employees – and those who did still have to pay it would only have had to pay it on amounts above that higher floor. But Governor Bush apparently felt this would give the truly wealthy insufficient tax relief, so he just cut the rate in half. In a vacuum, of course, that was a nice thing to do. Not important in any way – even at two-tenths of one percent, the tax was hardly more than a nuisance. But nice nonetheless. What guy with $5 million in mutual funds (say), doesn’t appreciate having to pay Florida only $5,000 instead of $10,000? But we don’t live in a vacuum, everything’s related, and so we get front page lead stories in the Miami Herald like the one excerpted above. ‘Make no mistake,’ the Herald quotes Broward County chief assistant public defender Howard Finkelstein – who himself battled drug addiction 14 years ago – ‘When we get done crunching the numbers . . . human lives will be lost or go unrepaired, and misery will be spread from generation to generation.’ But first things first. Do you know what it costs to resurface a driveway in Coral Gables? To outfit a private plane? And if the rich have drug problems – if their daughters are impersonating doctors and calling in phony prescriptions – they can afford to get help. *UPDATE: I may have been a bit TOO fair. Whatever loophole tightening they did became moot the following year: Jeb eliminated the tax altogether. The 50% cut in the rate became a 100% cut: to zero. The ultimate loophole. The New York Times January 31 BUSH BUDGET WILL SEEK CUTS IN PROGRAMS FOR JOB TRAINING By Robert Pear WASHINGTON, Jan. 30 – Even though unemployment has increased sharply in recent months, President Bush’s budget will seek cuts in several job-training programs for laid-off workers and young adults most affected by the rise in unemployment, budget documents and federal officials say. Bush administration officials question the effectiveness of some of the jobs programs, which Congress created with overwhelming bipartisan support four years ago. The United States Conference of Mayors sent a protest letter this week to the White House criticizing an administration plan to cut ‘youth opportunity grants’ to $45 million next year from $225 million this year. It’s all part of the economic stimulus plan, I guess. As is cutting $9.1 billion out of federal highway spending, a 29% cut from last year. A friend from Portland, Oregon, writes: ‘The President visited a job training center here about six months ago and last week announced that because of the war, they wouldn’t be able to fund that any longer.’ The rest of his message was unprintably disrespectful of the President. But if people really understood the extent to which the balance of the previous eight years has been shifted in favor of the rich and powerful – nothing against the poor and middle-class, mind you, but it’s just time the rich got a better shake – I think they would be upset. (In 1980, according to figures from Business Week, CEOs of large corporations earned 42 times as much as the average worker – compared with 531 times as much in 2000. So you can imagine how their tax bills have sky-rocketed. That must be why it’s so important to cut taxes for those at the top, even if it means ending drug treatment or job training programs, or halving the budget for alternative energy research.) Let me conclude with this clip, which I’ve already posted here once. Bear in mind as you read it that we devote less than 1% of our $2 trillion federal budget to foreign aid. The New York Times January 29 U.S. REJECTS BID TO DOUBLE FOREIGN AID TO POOR LANDS By Joseph Kahn WASHINGTON, Jan. 28 – The Bush Administration has rejected an international proposal to double foreign aid in the wake of the war in Afghanistan, contending that poor countries should make better use of the assistance they now receive, diplomats said today. What are we thinking? Can the solution to every problem really be tax cuts for the best off? Is this really America at our best and brightest?
McWhortle: A Very Small Cap Indeed February 5, 2002February 21, 2017 BUT FIRST A JOKE Forwarded by a neutral party: The Prime Minister of Israel, Ariel Sharon, sits down with Yasser Arafat at the beginning of negotiations to resolve the conflict. The Prime Minister requests that he be allowed to begin with a story. Arafat assents. Sharon begins his story: ‘Years before the Israelites came to the Promised Land and settled here, Moses led them for 40 years through the desert. The Israelites began complaining that they were thirsty and, lo and behold, a miracle occurred and a stream appeared before them. They drank their fill and then decided to take advantage of the stream to do some bathing — including Moses. ‘When Moses came out of the water, he found that all his clothing was missing. ‘Who took my clothes?’ Moses asked those around him. ”It was the Palestinians,’ replied the Israelites, ‘Wait a minute,’ objected Arafat immediately, ‘there were no Palestinians during the time of Moses!’ ‘All right,’ replied the Prime Minister, ‘now that we’ve got that settled, let’s begin our negotiations.’ TEST YOUR INVESTMENT SAVVY Thanks to Kate for bringing this one to my attention – a site offering an investment in McWhortle Enterprises. I’m not recommending you take a flier on McWhortle; but, like Kate, I was impressed by its S.E.C. imprimatur. You don’t often see that. It shows up on the third page. Click here. BIG-CAP, MID-CAP OR MADCAP? Randy Woolf: ‘I would be interested in your thoughts on total market index funds versus midcap or small-cap funds. I have some midcap spider shares [symbol: MDY] and plan on buying more. Isn’t the total market index very over-weighted by large, problematic companies like Cisco and Enron, and thus not really representative of the ‘total market’?’ ☞ No, a total-market index fund is more representative of the total market, because, like it or not, the total market includes problematic companies like Cisco and Enron. That isn’t to say which will do better over any particular time period. Your midcap index shares may beat the total-market index funds — or, if Microsoft’s automatic spellchecker is to be believed, the way it keeps automatically changing what I type, they may prove to be ‘madcap’ shares. Are midcap shares, as a class, undervalued relative to the market as a whole? I can imagine intuitive arguments on both sides. You could argue that the big cap stocks are overvalued because of the herd mentality – all the big fund managers feel they have to own them (where else are they going to park trillions of dollars?), and in times of uncertainty people gravitate toward the big names. Right? So they’ve been bid up past where they should be. Or you could argue that the small caps and midcaps are going to get hurt worse if we have tough times – they’ll have a harder time securing financing, they have less clout in the marketplace, less legal and lobbying muscle. I’m quite sure I don’t know whether the stocks of mid-sized companies will do better or worse, over the time period you had in mind to invest, than the market as a whole. If I were looking for an index fund, I would probably go with whichever one offered the broadest diversification with no more than a two-tenths-of-one-percent (’20 basis points’) annual fee. THAT EXPLAINS IT Bob Ridenour: ‘I finally figured out why Ken Lay looks so familiar (and why he may seem nice) – he looks exactly like Tim Conway!’
Ah, the Things We Take for Granted February 4, 2002February 21, 2017 Our American Airlines 777 had landed in Miami – 20 minutes early – and those of us in business class were right there by the door, waiting to deplane. The jet bridge wasn’t meshing with the door properly, and there was some understandable foot tapping. But the fellow next to me became really annoyed. Where a little world-weary wry humor might certainly have been in order, if one were in that sort of mood (I wasn’t), he was telling the flight attendant how incompetent the airline was. He pronounced it very precisely, several times, with increasing exasperation, as the wait stretched to what must ultimately have been six or seven minutes. Ultimately, the plane inched very gently forward a foot or two, the Jet Bridge meshed, the door opened, and we went on our way. ‘You would think after all this time they would have developed the competence to do this correctly,’ he was now saying to some stranger just ahead of me on the jet bridge. And I am thinking, ‘Hmmm – let’s see. We have just flown across the continent in four hours and thirty-eight minutes. Our reclining Business Class seats offered extending leg rests, power for our laptops, head rests and an inflatable lumbar support. We had our choice of movies, a magnificent lunch, a choice of ice cream or tiramisu for dessert and then, later, freshly baked cookies and milk. The climate was controlled, the bathrooms ample. We landed early and safely. But the pilot stopped a couple of feet short and we had to wait seven minutes. And he’s steamed? What must this guy be thinking! (And what would Wilbur and Orville have been thinking? And what would the same journey have been like even a single lifetime ago, let alone two?)’ I mean, a little amused irony would have been fine – ‘Geez, we can do all this but we haven’t figured out how to stop on precisely the right dime?’ But this guy was steamed. The irony, of course – because, yes, irony does abound – was that I could see he was headed to baggage claim. He was rushing for nothing. Baggage claim in Miami is horribly slow, and he may still be there waiting for his bags. (I kind of hope he is.) * Half the people on earth live on less than two dollars a day. A billion people go to bed hungry every night and a quarter of the people on earth never get a clean glass of water. Like most of us, I tend to ignore that and get annoyed when there’s traffic or my cell phone drops a call. Still, I would argue that these are – for most Americans, Europeans and Japanese, and certainly for those of us fortunate enough to fly business class – the good old days. But what’s next? It could go either way. If you have time, click here. No one has a clearer worldview.
Lowering the Capital Gains Rate To ZERO February 1, 2002February 21, 2017 (Like yesterday’s column, this one is adapted from a column I wrote for Time a decade ago.) A broad tax break for capital gains, as has been pushed by some, would be expensive and dumb. To begin with, applying the break to investments we’ve already made does relatively little to encourage new ones. Any tax break should be on future investments only. But even there, aggravating our already problematic two-tiered system – with one income tax rate for “ordinary” income and a much lower one for capital gains – would do little more than increase the incentive to concoct schemes to convert the former to the latter. As a nation, we don’t need more tax lawyers devising tax-driven strategies; we need a simple tax system that doesn’t distort economic decisions. The notion of indexing gains to inflation – to tax only “real” gains – would add a whole new level of complication in computing taxes. And is it fair? It insulates those with assets from the effects of inflation, but not those without assets, whom inflation already hits hardest. (And homeowners ALREADY have big tax breaks. The first $250,000 in gains on the sale of a primary residence, or $500,000 if filing jointly, are tax-free.) Furthermore, insulating voters from inflation makes them more tolerant of it and, thus, its rise more likely — but its effects, ultimately, no less devastating. And why cut the capital gains rate on real estate or fine art or collectibles? To inspire construction of even more shopping centers? Yes, the capital gains rate should be cut — to ZERO! — but only on future investments, and only on the purchase of newly-issued stocks and bonds. Found a company in your garage? You are the owner of newly-issued securities. The tax rate on gains when you sell would be zero. Dump some venture capital into your neighbor’s garage start-up? You, too, have bought newly issued securities. The tax rate on gains when you sell would be zero. Snap up a few shares when the stock eventually goes public? You, too, are the owner of newly-issued securities. The tax rate on gains when you sell would be zero. But once those securities start trading in the secondary market, they are no longer newly-issued. There would be the same tax as now on trading gains. There’d still be just as much reason to buy and trade in the secondary market as there is today – God bless America’s liquid capital markets – but the ZERO capital gains rate would be reserved for the thing we most want to encourage: funding new enterprise. Such a rifle-shot tax cut would be a huge incentive to invest in new companies, and to fund the expansion and modernization of old ones, but at a tiny fraction of the cost of an across-the-board cut. It would be a boon for Wall Street, making it that much easier to find buyers for newly issued stocks and bonds. And it would be a snap to administer. If you’ve ever bought stock in a public offering, you’ve seen that the broker’s confirmation slip already denotes this. (‘Prospectus sent under separate cover,’ the confirm you get in the mail usually says.) So the computer already knows which shares and bonds you own from a new securities offering. The year-end statement you get would have one more box with this information. TaxCut and TurboTax and H&R Block could all handle this with ease. It would be cheap, it would be simple, and it would do exactly what the administration claims it wants to do: stimulate new investment to improve productivity and create jobs. (Meanwhile, it should be noted that the emphasis on a “long-term holding period” – or the new ultra-long 5-year holding period beginning with assets purchased after the year 2000 – may be overdone. Why reward people for holding something even a minute longer than they think it represents the best available value? Why distort the market this way and dampen its liquidity? Why shackle the invisible hand? The decision of how best to invest one’s capital should depend on where it can get the best return, not on tax strategies. There’s ALREADY plenty of reason to hold assets a long time: first, you minimize brokerage commissions; second, there’s NO tax due until you sell – you can let your profits build tax-free for decades! The real movers and shakers in the market, the pension funds, pay no capital gains tax anyway, so imposing a long-term holding period on the rest of us would have little impact on management’s rightly-lamented short-term focus.) You can argue for the old six-month holding period, or even today’s one-year period, as a means to discourage our worst gambling instincts (not that it always does much good). But five years? The beauty of the capital markets is their ability to allocate money efficiently. That’s the ideal, anyway. So why erect artificial barriers to capital’s free flow? Unlike yesterday’s much more important tax proposal – a huge gasoline tax phased in from 2004 through 2016, every penny of which would be used to lower the tax on working and saving (with an increase in the earned income credit to help the working poor) – this one, it seems to me, actually would have a prayer of passing. It’s the sort of targeted, stimulative tax cut Democrats have been talking about, and contrasts sharply with the massive tax cuts geared largely to the rich and to large corporations that our friends in the other party seem to believe are needed to get the economy moving again. Yet how could any Republican oppose a zero percent tax rate on capital gains, even if it were limited to where it might actually do some good?