If and when the recession deepens, discussion can be expected to intensify over the best type of tax cut to stimulate the economy. One proposal that might be considered is a tax incentive for investing in common stocks.
Some economists believe that an across-the-board reduction in taxes to increase spending only would prove more inflationary in the long run. Proponents of this theory favor tax incentives to foster saving, thereby increasing productivity through capital formation. One method enjoying widespread popular support is an exclusion for the first $100 interest earned on saving accounts. Other more direct alternatives being discussed include faster depreciation write-offs, tax deferrals for reinvested dividends and tax exemptions when money from the sale of one security is rolled over, that is, reinvested in another.
The number of individual stockholders in this country has declined from 31 million at the beginning of the decade to 25 million in 1975, according to the latest New York Stock Exchange census. Their ranks may have swelled some since then -- Congress reduced capital gains taxes in 1978 -- but new businesses, which often are speculative investments, continue to lack venture capital. To assist small business, Sen. Lowell Weicker (R-Conn.) has introduced a bill calling for a tax credit of up to $750 a person for purchases of stock in companies with less than $25 million in equity capital. Rep. Neal Smith (D-Iowa) has introduced a similar bill in the House. The drawback from the Treasury's viewpoint is an anticipated revenue loss of $70 million.
A grassroots movement appears to be springing up to extend the principle to the entire equity market. Several groups cite the experience of France, which put such a law into effect on June 1, 1978. In the next 12 months, 850,000 new investors purchased stocks and the value of new stock issues increased 214 percent to $1.05 billion, according to the French Finance Ministry. The Paris Bourse's general stock index rose 26.6 percent during that period.
The law, named for Economy Minister Rene Monory, permits an investor to deduct about $1,200 from his or her income tax, plus an additional $120 for each dependent child, if he or she buys domestic securities. Sixty percent of the holdings must be stocks, held for a minimum of four years. The investor may repeat the operation annually, but in each case must hold the stocks for four years.About 80 percent of those taking advantage of the law, which is due to expire in 1981, invested through bank-managed mutual funds, while the others selected their own investments.
The French economy is generally considered to be suffering from lack of productive new investment. Despite this influx of capital, very little new plant and equipment has resulted, according to one financial analyst in Paris. Many companies took the new funds largely to retire old debts.
This March, the Province of Quebec inaugurated a similar plan to reduce the tax burden on upper-income taxpayers and generate additional capital for Quebec-based enterprises. This law, named for Quebec's finance minister. Jacques Parizeau, allows an individual to deduct up to 20 percent of earned income up to a maximum of $15,000 for the purchase of newly issued shares. They must be held for a minimum of two years.If an investor sells one Quebec stock for another within the period, he or she still may claim the provincial tax deduction, although he or she must pay capital gains tax on the profit.
Montreal brokers report the Parizeau law is generating droves of new accounts. Louis Rousseau, president of Molson, Rousseau Inc., said his firm opened 420 accounts on a recent Canadian Pacific Investments Ltd. stock issue. Many were from the firm's bond clients who rarely buy shares. Charles Wiltshire, the sales manager of Greenshields Inc., said the 50 salesmen in his Montreal office are finding lost of new business in the Quebec issues. Although-admitting he didn't think too much of the plan at first, Wiltshire said he didn't reckon with John Q. Public "who thinks it's great."
Because not every wage earner is able to write a check for $15,000 and only earned income is eligible, brokers are offering 50 percent margin accounts. The Bank of Montreal has approached several Montreal brokers, seeking to lend their clients money for this purpose.
Incidentally, the law was created as the result of numerous complaints that high provincial taxes make it hard for a Quebec-based company to attract top-level personnel from elswhere. Because it would have been politically difficult to cut taxes for high-income individulas, the Parizeau plan was an effort to compromise.
According to Arthur Andersen & Co., less-ambitious tax increntives for equity purchases also are offered in Brazil and West Germany, but they are said to have had little impact. Price Waterhouse names in addition Spain, Uyana and several Asian counties Sweden also makes some allowance.
In the United States, the Securities Industry Association is sponsoring a poll to determine investor reaction to various tax incentive proposals. One calls for excluding up to $2,000 used to purchase corporate securities. The survey of 600 people, conducted by Opinion Research Corp., is schedule for release this December, said Jeffery Schaefer, SIA's director of research.
Among the most vocal advocates of this concept is Tom O'Hara, chairman of the National Association of Investment Clubs, in Royal Oak, Mich. O'Hara, who is seeking support on Capitol Hill, proposes a 20 percent reduction in taxes on up to $2,000 invested in common and preferred stock and bonds of domestic corporations. In exchange, the stock must be held for five years or rolled over into another. Dividened income would be tax exempt. Moreover the base for capital gains taxes would be the highest value of the stock, not the selling price, a provision designed to give the investor additional incentive.
Funds for stock purchases must come from wages so the country does not incur more debt. Investments could be made directly or through mutual funds or investments clubs.
O'Hara has projected that 10 million persons might be expected to buy stocks over a five-year period, injecting $20 billion in new capital into the market. He acknowledges that the Treasury would suffer a drain during the first six months, but claims this would be more than made up later by taxes paid by workers filling the 500,000 new jobs created.
(A broadened stock ownership plan similar to O'Hara's was proposed by the Ford administration in early 1976 mainly as an alternative to Sen. Russell Long's promotion of employe stock ownership plans allowing workers tax incentives for buying stock only in their firms. It fizzled. At the time, the revenue loss to the Treasury of a broadened plan was estimated at $300 million.)
Another backer of tax incentives for equity purchases is the Committee of Publicly Owned Companies, located in New York. Now seeking support in the business community, the organization said it has not mapped out a program as specific as O'Hara's. A spokesman insisted there are many ways to structure one, but the essential requirements are that it increases investor participation, enhance capital formation and present an acceptable revenue loss.