As tax legislation moves through Congress, one can spot plenty of amendments giving this or that to various special interest groups that fruitfully work the congressional corridors. But nothing is quite so outrageous as the so-called "All-Saver" tax-exempt savings certificates being hustled by a well-heeled and aggressive thrift industry lobby.
The thrift industry -- savings and loan associations all over the country and the mutual savings banks in a few states -- is in real trouble. Soaring interest rates have forced them to pay double-digit returns to attract deposits, while the average yields on their portfolios of home mortgages, many of which were written along time ago, remain in single digits.
This year there has been one failure and a string of voluntary and involuntary mergers among the S&Ls. According to government figures, 119 S&Ls were merged out of existence in 1980, and already 80 this year, through the end of May. The industry as a whole could lose anywhere from $4 billion to $6 billion this year unless interest rates come down in a hurry.
The "All-Saver" certificate is not the only bad idea being floated to help the S&Ls. Federal Reserve Board Chairman Paul A. Volcker has asked Congress to impose reserve requirements on money market funds that provide checking services. Ostensibly, the cash "reserve" set aside and not invested would provide some additional safety features for these funds.
Because the "reserve" would lower the interest rates that the funds could pay, it would reduce the competitive interest rate advantage the money-market funds have enjoyed over banks and S&Ls. As Citicorp Chairman Walter Wriston said on Meet the Press last Sunday, this is an effort to "shackle" the money market funds which give consumers "a fair return" on money, whereas "all the commercial banks, under the Fed's rules, really rip off the consumer by paying him too low an interest rate."
Says economist Alan Greenspan: "The money market funds hold assets (close to cash) that would be considered reserves by other institutions. You could say that they are in in a 100 percent reserve situation. The proposal to put a reserve requirement on MMFs is designed arbitrarily to restrict their competitive position. There is no economic rationale for it (that is, in terms of safety for the depositor). The idea of a reserve is to facilitate the conversion of assets. But what the MMFs hold is all rather liquid."
As a basket case, the thrift industry needs help.To protect the depositors of many weak S&Ls that ought to be merged into stronger institutions, the government should change present law, which limits eligible buyers: not only should out-of-state S&Ls be permitted to absorb their weak sisters, but so should banks.
Instead, Congress is trying to pump money into the S&Ls by launching a tax-free certificate that they can dangle in front of depositors. That's a costly and ill-advised way to bail out the thrift industry. If banks are included, as the Senate Finance Committee version would allow, we will be creating a brand-new $5 or $6 billion tax loophole. And who would pay for this generosity? Low-income and middle-income taxpayers, everyone below the $35,000 to $40,000 income level, who would have no way to benefit from the loophole.
Here's the way this "All-Saver" legalized steal would work: The thrift institutions could issue special certificates, for a period of one year, paying only 70 percent of the Treasury bill rate. Buyers of those certificates would not have to pay taxes on the interest earned, up to $1,000 for an individual and $2,000 for a family. In the Senate version of the bill, banks as well as S&Ls could participate. The House bill attempts to limit the gravy to the S&Ls, at the same time reducing the present $200 to $400 exemption of dividend or interest income to its former levels.
What a piece of cake for the institutions! The tax-free feature would enable them to attract deposits at only 70 percent of the going rate. For example, if Treasury bills paid 14 percent, they could sell these special certificates and pay only 9.8 percent interest on them.
For investors in the upper brackets (the higher the better), this is a good deal. Take someone in a 40 percent tax bracket. If he or she has a taxable investment earning of, say, 14 percent, the after-tax return is only 8.4 percent. How much nicer to get 9.8 per cent tax free at your friendly S&L! Upper-bracket families will be able to shelter about $20,000 worth of investments in such special certificates.
The notion that this proposal has any meaning for small savers because it would be available in small denominations, as suggested in a letter to the New York Times by Michael C. Stevenson, president of the Savings and Loan Foundation, is ludicrous.
Families earning less than about $40,000 -- around the 33 percent bracket -- would have to have holes in their heads to buy the "All-Saver" certificates. Take a family in the 20 percent tax bracket with $2,000 to invest. At 14 percent, an investment in a money market fund would yield $280 a year, and the tax bite would be 20 percent of that, or $56, for a net after-tax income of $224. A $2,000 "All-Saver" certificate at a tax-free yield of 9.8 percent would return only $196.(S&L and bank certificates, to be sure, are federally insured, but safety is not the focus of the debate -- surely not at a time when it is the S&Ls that face the need for government bailouts).
Critics also point out that tax-exempt S&L certificates will force states and localities that now issue tax-free bonds to meet the competition, which is another way of saying the cost of running local government will go up. And this will happen just at the time the states and municipalities will have to step in with regressive sales and property taxes to fill some of the void left by President Reagan's federal budget cuts.
Finally, the phoniest part of the whole charade is the suggestion this is just a one-year giveaway. A $300 billion list of tax expenditures now in the budget ought to be proof that once these egregious drains on the public trough get into the tax code, they stay on forever.
Neither the administration nor congressional Democrats want this "All Savers" nonsense. It won't create new savings, merely a shift by interest-sensitive investors in the upper brackets. On the Hill, congressmen acknowledge that it's totally indefensible but say they can't hold out against the S&L lobby.
I don't understand why congressmen feel bamboozled by the S&L lobby. What we need is a public outcry, loud and quick.