THE STEIGER AMENDMENT evokes strong feelings. The amendment, you will recall, would cut capital-gains taxes, mainly for people with large incomes. We observed the other day that it is an offense to public morality. Since then we have heard from a good many of our readers; a sample of their letters appears on this page today. While you would not quite call it an avalanche of denunciation, it is a spirited reply. Rising to the bait, we shall now offer a few more thoughts on capital gains and taxes.
Thehypothetical middle-income couple in our example had bought their house years ago for $35,000 and recently sold it for $135,000, for a capital gain of $100,000 and a tax on that gain of $17,490. A number of readers observe that, if the original purchase was in 1955, almost exactly half of that capital gain is pure inflation. The purchasing power of $35,000 in 1955 is the same as $84,000 today. Those letters bitterly ask whether it is fair to assess taxes on appreciation that is merely the result of inflation, rather than a rise in real value.
That's a serious and important question of equity. But wait a minute. If we want to be absolutely fair - and who, in this litigious country, will settle for anything less? - we have to note that our hypothetical couple didn't pay cash for their house. Like most of us, they bought it with a 20-year, five percent mortgage. The inflation adjustment has to be made not for the date when they bought the house, but the dates when they actually paid the money - that is, the dates of the 240 monthly payments. We also have to notethat our hypothetical couple has taken tax deductions all those years of their mortgage-interest payments. They deducted at the nominal rage - which is 5 percent. The real rate is the nominal rage minus inflation. For most of the years since 1968, the real rate on a five percent mortgage has actually been negative - that is, the bank was paying our couple for having borrowed its money. If Congress is going to let them adjust their capital gains for inflation, won't consistency compel it to require them also to adjust all of those past mortgage payments and deductions for the same inflation?
If it did, they would need a computer to figure out their tax return. No sane person would seriously support the idea. But the point is that you can't stop with just one figure. If the tax code is to take account of inflation, it leads to a brain-busting series of adjustments to adjustments to adjustments.
The Steiger amendment would do only one thing for the couple in our example, and it has nothing to do with inflation. It would exempt sales of homes from a rule called the minimun tax, saving our couple about $4,000 of their $17,490 capital-gains tax. That's reasonable thing to do. Last January, in fact, President Carter proposed doing precisely that.
But the Steiger amendment goes much further. It would abolish the minimum tax altogether, and lower the rates of capital-gains taxes for everybody in the highest brackets. The amendment's author, Rep. William A. Steiger (R-Wis.), says that he wants to encourage productive investment in industry - a laudable purpose. It's possible to write tax legislation that would encourage that kind of investment specifically. But his amendment would give the same breaks to everyone making money trading in land, paintings, antiques and gold. That's not productive investment, and there's no reason whatever to encourage it with expensive new tax benefits.
A final note on homeowners: Most people buying houses on mortgages, in the current inflation, are doing well out of it. The victims are the thrifty souls who financed the mortgages by putting their money into savings accounts. Inflation is cruelly unfair. It enriches borrowers. The people who get sheared are the savers and lenders.