For the past six months the way to sound weighty, knowing and responsible around this town has been to pull on your gray beard and talk about "capital formation." It's a term which ought to be reserved to architects and others contemplating Corinthian columns, although on Wall Street and up and down Pennsylvania Avenue, it means allowing business to accumulate enough extra dough so that it can buy new plants and new machinery which will in turn put Snow White and the Dwarfs whistling while they work.
The argument most forcefully and most often advanced for cutting the capital gains tax, the tax on the profit from the sale of a house or stocks and such, is that it would encourage badly needed capital formation. Without capital formation and lost of it we have been repeatedly informed we'll sink into the economic pits.
The prevailing reasoning is that once they know they won't be too badly hurt by taxes, many will sell stock and properties they've been holding for years, and invest the profits in new venturs and new productive capacity. It's persuasive if you're looking for a reason to cut taxes, but we have some new figures in Business Week magazine (Sept. 18) which discredit the capital formation idea.
The 545 largest companies have no less than $80 billion in cash in their vaults. In other words, capital formation has already occurred. The boys have got the money, only they won't spend it.
Here in Washington, they talk about making sure the oil companies have enough dough to go prospecting but Exxon, alone, has almost $4 1/2 billion in its poke. Mobil, Gulf and Standard of California each have well over a billion in cash they can spend any time they want.
Thus even before the deed has been done, the truth of an old lesson has been demonstrated anew: Manipulating tax codes and tax rates to run the economy seldom works. Taxes should be levied, lowered or raised only to get the revenue the government needs to pay its bills.
A variety of reasons are proffered for all that cash. Government securities are safer and the return is as good as investing in a new plants; there aren't enough good lookin investment opportunities: we have enough productive capacity, we don't need any more. Funny talk from businessmen whose whole training and raison d'etre is to see how you can make one dollar divide into two.
It may be that businessmen are spooked. William Valiant, the trasurer of the Borg-Warner company, says "Most major decision makers in the United States had just come through the only deep recession in their business careers and they are very cautious about spending. When you've just come back from fire, you don't jump back into it with both feet."
The last recession was harrowing for a lot of businessmen. Many companies found themselves with next to no money in the till and undoubtedly the experience taught them to stay far more liquid than they had in the '60s when it seemed like the reign of perpetual gold had arrived. Beyond the prudence of past msitakes, however, an admonitory premonition of bad things to come has seized the spirits of businessmen. It has less to do with their picky, picky, picky attitude toward the Carter administration than with an ineradicable sense that something awful is going to happen. The high profits and relative prospertiy of the past couple of years, the modest but certain rise in the stock market - none of this has worked to mitigate the need to clutch and hold on to hard, cash money.
Obviously making more money available for investment isn't going to help if the feelings in the businessmen's tummies won't let them invest the gargantuan sums they already have. What's needed is improving the climate for buisness, as the economists say when their numbers grow fuzzy in front of their eyes and no better explanation is at hand, but the climate, as far as government creating it is concerned, has rarely been better since Calvin Coolidge lived in this city.
Aside from helping rich people to keep even more of it, the only argument left the capital gains tax cut is that it might buck up business morale. Here, genlemen, we passed this law for you so you'd know we love you, we won't regulate you or control you or complain about exploding gas tanks and shredding tires. You are the goose which laid the golden egg, so honk a little and drop your glistening load.