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- | Welcome to this week's commentary | 0:02 |
on the current economic scene. | 0:03 | |
This for the week of February 25th. | 0:05 | |
With us again this week is Professor Paul Samuelson | 0:08 | |
from the Massachusetts Institute of Technology. | 0:11 | |
Professor Samuelson, first of all, | 0:14 | |
how do you stand on the great guessing game | 0:16 | |
that is going on at the moment? | 0:18 | |
Will the prime rate move, | 0:19 | |
and which way will it go when it does move? | 0:21 | |
- | My guess, for what it's worth, | 0:23 |
is that the next move of the prime rate | 0:25 | |
will be definitely upward. | 0:28 | |
This rate, which is what banks charge | 0:31 | |
to their best customers, is now 7%. | 0:33 | |
The discount rate of the Federal Reserve | 0:37 | |
is five and a half percent. | 0:40 | |
The actual going rate for euro dollars, | 0:43 | |
which the banks have been relying upon | 0:46 | |
to a great extent, is over 8%. | 0:48 | |
As the president of the First National Bank of Boston, | 0:52 | |
Mr. Damon said recently, something has to give. | 0:55 | |
I think maybe a couple of things will have to give, | 0:59 | |
and one of them, I suspect, will be the prime rate. | 1:03 | |
I shouldn't be surprised, I ought to add, | 1:08 | |
that we'd get another twist of the screw | 1:10 | |
with respect to the discount rate | 1:13 | |
because, make no mistake about it, we are now in a period | 1:16 | |
of tight money by any definition. | 1:21 | |
I had predicted on these tapes | 1:26 | |
that we would have more of this, | 1:29 | |
and I have to simply reiterate that. | 1:33 | |
I expect interest rates to harden even father | 1:38 | |
before they go down again. | 1:44 | |
Now, why do I think the prime rate will go up? | 1:49 | |
I think it will go up because the demand for credit | 1:56 | |
on the part of customers, I think, is still very strong. | 1:59 | |
On the other hand, the supply of credit, | 2:03 | |
which the banks have to do a lot to those customers, | 2:06 | |
is being severely squeezed. | 2:09 | |
There was a conference board meeting last week | 2:12 | |
that some of you may have attended | 2:15 | |
or read about in the newspapers, | 2:17 | |
and there was considerable testimony at that meeting | 2:20 | |
that an uncomfortable process | 2:23 | |
of credit rationing is now going on. | 2:27 | |
Walter Hoadley, of the Bank of America on the west coast, | 2:29 | |
the largest bank in the country and in the world, | 2:34 | |
said that they have put in a new order of rationing. | 2:37 | |
There are many loan purposes, | 2:41 | |
which previously had been honored, | 2:44 | |
which today will not be honored | 2:46 | |
if you go to your branch manager, | 2:48 | |
or even to central headquarters of the Bank of America. | 2:50 | |
Such activities as takeover activities, | 2:54 | |
which always are regarded | 2:58 | |
as having something of the unsavory | 3:00 | |
in them as against the, | 3:02 | |
and I quote now from the 1913 Federal Reserve Act, | 3:04 | |
the legitimate credit needs | 3:09 | |
of business, agriculture, and manufacturing. | 3:11 | |
Commerce, agriculture, and manufacturing. | 3:15 | |
They're clamping down. | 3:18 | |
Well, if they're clamping down on those purposes, | 3:19 | |
you can be sure that the definition | 3:21 | |
of what is credit-worthy is rapidly changing. | 3:24 | |
I think the prime rate is already, in a hidden way, gone up. | 3:30 | |
The marginal firms, who sometimes qualify | 3:34 | |
for the prime rate, are, this very day, | 3:37 | |
not qualifying for the prime rate. | 3:40 | |
And most of the firms who do qualify for the prime rate | 3:42 | |
are finding that it's good diplomacy | 3:46 | |
to keep a larger compensating balance idle, | 3:50 | |
earning no interest, with the banker who's extending | 3:55 | |
that prime rate to you. | 3:59 | |
But explicitly I would expect it to go up. | 4:00 | |
One more straw in the wind, | 4:03 | |
at the same conference board meeting, | 4:06 | |
a first vice president of the prestigious | 4:10 | |
New York Federal Reserve Bank | 4:14 | |
spoke out candidly to the assembled bankers there | 4:16 | |
and told them to ration their credit more tightly. | 4:21 | |
He said, "Mere credit-worthiness isn't any longer enough." | 4:26 | |
And he implied that the social purpose required | 4:30 | |
that they squeeze down pretty hard. | 4:33 | |
Well, their self-interest in a time of limited funds | 4:39 | |
demands that they squeeze down pretty hard. | 4:45 | |
And they will, and their self-interest, to my mind, | 4:47 | |
suggests that over a longer period of time, | 4:52 | |
instead of rationing the credit | 4:55 | |
by a non-market mechanism, | 4:59 | |
which means that you make a free gift to the lucky fellow | 5:07 | |
who happens to qualify for the rationed item | 5:10 | |
and you deprive an almost equally worthy person | 5:13 | |
of any advantage by refusing him a loan completely, | 5:18 | |
or cutting his loan down drastically, | 5:21 | |
a more profitable and a more even-handed way of doing it | 5:24 | |
would be to raise the rate for everybody | 5:28 | |
to that rate which clears the market. | 5:30 | |
And I think that that process is going on, | 5:32 | |
I think it will go on more in the future. | 5:35 | |
I would like to comment on one other matter, | 5:43 | |
one of our subscribers, in a telephone call to me, | 5:48 | |
said that he had read the famous article | 5:53 | |
by Ed Dale in the New York Times of a few weeks ago, | 5:57 | |
in which he spoke about the big joke | 6:02 | |
that's going around everywhere in knowing circles, | 6:05 | |
the object of laughter being the Federal Reserve. | 6:09 | |
All of us sophisticated people are saying, "ha ha ha" | 6:13 | |
at the stupid, comical Federal Reserve. | 6:17 | |
And he asked me, "What about that? | 6:23 | |
"What is the joke?" | 6:24 | |
Because although he's a fairly prominent New York banker, | 6:26 | |
he wasn't in on it. | 6:28 | |
I hate to confess my provincial ignorance, | 6:32 | |
but I said to him, "Well, I'm not in on it either, | 6:37 | |
"but I'll find out." | 6:41 | |
and so when I went to some New York meetings | 6:44 | |
where the real elite of the financial world were, | 6:50 | |
I said to them, "What's the big joke | 6:56 | |
"that we're all laughing about?" | 6:58 | |
And each one confessed that he didn't know either. | 7:00 | |
It was the case of the Emperor's Clothes, | 7:06 | |
nobody wanted to admit that he wasn't in on this, | 7:10 | |
but nobody really knew what it was all about. | 7:13 | |
It's the way some of us feel | 7:17 | |
when we're at a very sophisticated dinner party | 7:18 | |
and such terribly, terribly amusing stories are told | 7:21 | |
in French, and our graduate student knowledge of French, | 7:27 | |
which is pretty rusty, doesn't do us good service, | 7:30 | |
and so we nervously laugh along with the crowd. | 7:33 | |
I thought, well then I'll go down to Washington | 7:38 | |
and I'll find out from sophisticated people there | 7:40 | |
what the big joke is. | 7:42 | |
And it turned out that they didn't know. | 7:44 | |
Then I went to the Federal Reserve, | 7:49 | |
and they felt a little bit, I think, | 7:51 | |
like a professor when the class suddenly snickers | 7:53 | |
and you look down and see | 7:55 | |
whether all your buttons are buttoned. | 7:56 | |
But they weren't sure just what the joke was. | 7:58 | |
Well Dale didn't tip his hand, | 8:01 | |
which is a very good idea, I think, in this case. | 8:03 | |
He indicated that part of the joke was | 8:08 | |
that although the Fed was squeezing, | 8:11 | |
the banks were responding to that squeeze | 8:15 | |
by using euro dollars. | 8:17 | |
Well, I don't know what's so novel about that. | 8:19 | |
I don't know what's so comical about that. | 8:23 | |
It's exactly what one would've expected | 8:25 | |
from economic law to happen. | 8:28 | |
It has been happening to a considerable degree, | 8:30 | |
and the joke of the joke is that just as Dale was writing, | 8:33 | |
their turning to euro dollars was not sufficient | 8:38 | |
to offset the squeeze by the Federal Reserve | 8:43 | |
because now that we have the first few weeks' figures | 8:46 | |
of the credit base and the money supply, | 8:51 | |
and the growth of credit proxy in all these matters, | 8:55 | |
we find that there has been a severe squeeze. | 8:58 | |
The other thing, which is just hinted on | 9:01 | |
in the Dale article, | 9:03 | |
would have to do with something more interesting | 9:06 | |
and even more serious. | 9:09 | |
Namely, that the Fed thinks it's squeezing | 9:11 | |
and is looking at the wrong variables, | 9:17 | |
such as interest rates, and in fact isn't squeezing | 9:18 | |
because if you look at the right variable, | 9:23 | |
such as the rate of growth of the money supply, | 9:25 | |
you would find that money wasn't tight. | 9:28 | |
Well, at the time that Dale was writing, | 9:31 | |
and for some time earlier than that, you couldn't say that. | 9:34 | |
If that had been the intention of the joke | 9:40 | |
and if it had been written back in, | 9:44 | |
oh, let us say July or even back in November, | 9:47 | |
then one might've had a little innocent merriment | 9:52 | |
at the expense of the Fed, | 9:55 | |
and I may say, it couldn't happen to a nicer bunch of guys, | 9:57 | |
on this particular point. | 10:00 | |
So I conclude that my subscribers | 10:04 | |
had better call up Ed Dale personally | 10:09 | |
and find out from him what it is | 10:12 | |
that we all are laughing at. | 10:16 | |
- | Professor Samuelson, do you think | 10:21 |
that the recent weakness in the stock market | 10:23 | |
has anything to do with new Nixon policies? | 10:25 | |
- | I never pretend that I can explain | 10:28 |
the movements of the stock market before the fact. | 10:32 | |
And actually, I never claim that I can explain | 10:37 | |
the movements of the stock market after the fact, | 10:41 | |
although there are many more who feel themselves eligible | 10:44 | |
to that task than to the earlier task. | 10:48 | |
However, I'll just speculate, | 10:53 | |
if I may use that word, on the matter. | 10:57 | |
I believe that the testimony by Paul McCracken, | 11:02 | |
and by members of the Council of Economic Advisors, | 11:08 | |
and by the Treasury, | 11:11 | |
indicating that the surtax would, in all likelihood, | 11:12 | |
be maintained after July 1st, was noted by the market. | 11:16 | |
I find it hard to believe | 11:22 | |
that such a sophisticated group as Wall Street | 11:25 | |
would consider this to be new news at this time | 11:28 | |
and would not have discounted and re-discounted | 11:32 | |
that particular bit of news in advance. | 11:35 | |
But I suppose every increase | 11:38 | |
in one's confidence in a bit of news | 11:41 | |
is an essential change in one's information pattern. | 11:43 | |
So that could be a part of the argument. | 11:46 | |
The second is a little bit broader | 11:49 | |
and a little bit, perhaps, more ideological. | 11:51 | |
The testimony by the Council Advisors | 11:54 | |
and by various Treasury officials | 11:58 | |
has indicated that there is a real serious concern | 12:01 | |
on the part of the Nixon Administration | 12:04 | |
about the current rate of inflation. | 12:06 | |
And there is a willingness to pay something | 12:09 | |
in the way of cost to slow down that rate of inflation. | 12:13 | |
Now, the cost has to do with overall unemployment, | 12:19 | |
has to do with unemployment among the marginal groups | 12:23 | |
who suffer the highest rate of unemployment, | 12:26 | |
and has something to do with the rate of real growth | 12:29 | |
of the American economy in the period ahead. | 12:32 | |
Well, with officials making noises like that, | 12:37 | |
I suppose that that would be a market influence. | 12:42 | |
But, again, this is not a new element. | 12:44 | |
And one would've thought | 12:48 | |
that much of it would be discounted. | 12:49 | |
Perhaps what is new about it is that | 12:51 | |
when the new team came in at the very first, | 12:54 | |
there seemed to be a soft-pedaling of that kind of talk | 12:57 | |
beyond what would really be credible | 13:02 | |
to any sophisticated observer. | 13:05 | |
And so perhaps the market was reminded of something | 13:08 | |
which it had wished, in a Freudian fashion, | 13:14 | |
to push to the back of its mind. | 13:18 | |
Third, and now we're getting back to the first topic | 13:22 | |
I discussed, which is the state | 13:25 | |
of the interest rate picture, | 13:27 | |
I think that the sophisticated forecasters | 13:34 | |
of business activity have themselves | 13:39 | |
now become convinced on the basis of a few weeks, | 13:42 | |
rather severe tightness by the Federal Reserve, | 13:47 | |
that the Federal Reserve does mean business. | 13:49 | |
And if the Federal Reserve means business | 13:51 | |
not just for another few weeks, | 13:53 | |
but that this may be a long campaign | 13:55 | |
right throughout the year | 13:59 | |
of tighter money by any one of the definitions. | 14:02 | |
And so this is causing some of them, perhaps, | 14:08 | |
to make some write-downs in their quarterly estimates | 14:12 | |
of the gross national product | 14:18 | |
in some estimates on housing, in particular, | 14:20 | |
late in the year, | 14:25 | |
and what's very important to stock market analysts, | 14:28 | |
perhaps some write-downs in the pattern | 14:32 | |
of corporate profits, which they envisage | 14:35 | |
over the next six or eight quarters. | 14:39 | |
It's that picture with respect to profits | 14:42 | |
that is quite important, presumably, | 14:44 | |
for the determination of stock values. | 14:46 | |
Now, I don't know how important that has been. | 14:52 | |
If we take housing as an example, | 14:58 | |
we've had a really startling first month figures in January, | 15:00 | |
housing starts shot up to 1.8 million housing starts, | 15:05 | |
which is perhaps their all-time record, | 15:10 | |
and certainly the highest they've been | 15:14 | |
for a long, long time. | 15:16 | |
And more than one would've expected | 15:17 | |
on the basis of the slight faltering in housing, | 15:22 | |
which was detectable towards the end of last year. | 15:25 | |
I don't think we should make too much | 15:29 | |
of any one month's figures, | 15:31 | |
and certainly don't make too much of January figure | 15:33 | |
because it's a seasonally corrected figure | 15:35 | |
and it's pretty much a phantom figure. | 15:37 | |
I can't remember whether it's 8,000 starts | 15:40 | |
blown up by seasonal correction, | 15:43 | |
but except in the South and in the West, | 15:46 | |
January is not a good building month. | 15:50 | |
And you may get a nice seasonally corrected figure, | 15:52 | |
but it doesn't actually serve as a token | 15:55 | |
of very much that is happening. | 15:59 | |
Moreover, there's a technical factor | 16:01 | |
one has to watch out for. | 16:03 | |
You would think that the technicians would be paid | 16:04 | |
to watch out for it for us, | 16:06 | |
but apparently they don't take this | 16:08 | |
into account in their report. | 16:11 | |
There were 22 working days in January. | 16:13 | |
That is not a recurring January phenomenon, | 16:16 | |
that's a day more than happens in many Januarys, | 16:20 | |
and since they make a seasonal correction | 16:23 | |
only for the January-ness of January, | 16:25 | |
and do not divide by the number of working days, | 16:29 | |
you have a fictitious element of 1 in 22, | 16:33 | |
that's up to almost 5% increase, | 16:39 | |
that could be a purely fictitious one, | 16:45 | |
and that means that 1.7 million housing starts | 16:48 | |
might be just as good a figure as 1.8 million. | 16:54 | |
Nevertheless, I take this to be a straw in the wind | 16:57 | |
that credit availability has not yet become | 17:02 | |
too terribly restrictive in the markets | 17:08 | |
which are open weather-wise for building, | 17:12 | |
and I regard this as an indication of strength | 17:16 | |
in the first part of the year for housing. | 17:20 | |
I think that strength in the first part of the year | 17:23 | |
will be taxed quite severely | 17:25 | |
by the problem of credit availability later. | 17:29 | |
Well, all the glosses I've been making up 'til now | 17:33 | |
on the possible causes for the degree of weakness | 17:40 | |
that we've seen in the stock markets | 17:46 | |
in the last couple of weeks | 17:48 | |
have had to do with the possibility of a slow down | 17:50 | |
in the rate of growth of business | 17:58 | |
due to policies of the new administration, | 18:01 | |
or policies of the new look Federal Reserve Board. | 18:04 | |
But there is a more direct effect | 18:09 | |
which ought to be mentioned | 18:13 | |
in connection with the tightening of interest rates. | 18:15 | |
Bonds are competitors for stocks. | 18:21 | |
And interest rates can be thought of | 18:27 | |
as kind of an inverted price earnings ratio. | 18:30 | |
It's a price earnings ratio for a bond, | 18:34 | |
but the earning, of course, is the coupon of the bond. | 18:37 | |
If you can get five, six percent | 18:41 | |
on a tax exempt municipal bond, | 18:44 | |
and you can get that today | 18:47 | |
on some quite good tax exempt municipal bonds, | 18:49 | |
you have to feel, as a high bracket tax payer, | 18:53 | |
that you're pretty smart these days | 18:57 | |
in picking out conglomerate equities | 18:59 | |
that are gonna give you capital gains | 19:03 | |
that will end you up after taxes better off than that. | 19:05 | |
And I don't have to talk simply about tax exempts, | 19:10 | |
you're getting a sweeter yield on mortgages | 19:13 | |
and on all kinds of alternative investments to equities. | 19:15 | |
so at the margin, as we economists say, | 19:19 | |
where you are deciding between what percentage | 19:22 | |
of your portfolio you should put in equities | 19:27 | |
and what percentage you should put in, let's say, | 19:29 | |
short-term bonds with the high interest rates | 19:33 | |
that short-term bonds are now paying, | 19:37 | |
and which, I may point out, are almost free | 19:39 | |
of any default risk, and are almost free of any decline | 19:43 | |
in principal because interest rates will harden | 19:49 | |
in accordance with my own forecast, | 19:52 | |
they're almost free of that | 19:55 | |
because they're very short-term. | 19:56 | |
Well, that does change the marginal amount of money | 19:59 | |
that is going into the stock market. | 20:02 | |
If the effect that I'm talking about, | 20:06 | |
the competitive effect of interest yields, | 20:09 | |
upon investment in inequities | 20:12 | |
doesn't affect you directly, | 20:16 | |
you may be one of these chaps who says, | 20:18 | |
"Well, it'll affect other people | 20:20 | |
"and therefore it must affect me indirectly." | 20:22 | |
There's plenty of superficial evidence | 20:25 | |
that tight money measured by high | 20:29 | |
and growing interest rates, even when the outlook | 20:33 | |
for business is very strong, | 20:37 | |
and I think 1966 would be a case. | 20:39 | |
Let's take a date like August of 1966 or July of 1966. | 20:44 | |
All of the forecasts that were going | 20:50 | |
through Wall Street were for a strong outlook | 20:52 | |
for business ahead. | 20:55 | |
So strong that those people recommended | 20:57 | |
and went along with a recommendation | 21:00 | |
that the investment tax credit be suspended, | 21:02 | |
an act which took place | 21:06 | |
only a couple months later in September. | 21:08 | |
But money was very tight at that time, | 21:11 | |
and we did have weakness in the Dow Jones averages. | 21:13 | |
I should warn you and I should remind myself | 21:18 | |
that we don't know, in 1966, that the tightness | 21:22 | |
of money was the proximate cause | 21:28 | |
of the mid-year weakness in the stock market. | 21:31 | |
Because we have no controlled experiment on that. | 21:38 | |
Still, people in Wall Street whose judgment | 21:41 | |
I've learned to respect in the past, at that time, | 21:45 | |
were giving weight to that causal factor | 21:48 | |
and the subsequent pattern of events | 21:51 | |
suggests that they may have had a point. | 21:54 | |
I'd put it forward for your consideration here. | 22:00 | |
- | Professor Samuelson, we've been hearing | 22:03 |
a great deal of talk lately about tax reform. | 22:05 | |
Do you have any views on this subject for our listeners? | 22:08 | |
- | That's a very, very large topic, | 22:10 |
and I don't think that in the time that is left to me today | 22:12 | |
I can more than scratch the surface. | 22:17 | |
But let me say a few things about it. | 22:20 | |
First, I want to remind myself | 22:24 | |
that a little bit of the day-to-day weakness | 22:27 | |
in the stock market might've come about | 22:31 | |
because of a little jolt that the market got | 22:34 | |
when it read the news on the tape | 22:39 | |
that in the testimony of the Secretary of Treasury, | 22:42 | |
and Undersecretaries of Treasury, | 22:46 | |
there seemed to be, for the first time under consideration, | 22:48 | |
an actual suspension of the investment tax credit. | 22:53 | |
In September of 1966, the investment tax credit | 22:58 | |
was suspended as a new weapon | 23:05 | |
in our arsenal of business cycle control. | 23:08 | |
And the Secretary of Treasury and his Undersecretaries | 23:11 | |
in response to a question, | 23:18 | |
I believe from Representative Reuss of Milwaukee, | 23:19 | |
said yes, along with the problem | 23:24 | |
of continuation of the 10% surtax, | 23:28 | |
which was under consideration and reconsideration. | 23:35 | |
There was, under consideration, | 23:38 | |
a suspension of the investment tax credit. | 23:40 | |
That could make quite a bit of difference | 23:45 | |
to the earnings of railroads | 23:47 | |
and quite a number of industrial concerns. | 23:49 | |
Now, that could go under the heading of tax reform. | 23:53 | |
Let me give you a wild guess in this matter. | 23:56 | |
I think I know the records of Charles Walker, | 24:02 | |
the Undersecretary of the Treasury, | 24:06 | |
and David Kennedy, the Secretary of the Treasury, | 24:09 | |
and I do not believe that at any time | 24:13 | |
they have had, under serious consideration at all, | 24:17 | |
a suspension of the investment tax credit. | 24:20 | |
This goes counter to republican philosophy at its core. | 24:23 | |
This is a typical John F. Kennedy | 24:30 | |
new frontier kind of gimmick. | 24:34 | |
And I can say that in all good faith | 24:36 | |
because it's my kind of gimmick. | 24:38 | |
It's the kind of thing that I very strongly recommend, | 24:40 | |
but I don't think I could persuade | 24:44 | |
good ol' Charles Walker of the wisdom of this. | 24:46 | |
So corporate controllers, and accountants, | 24:50 | |
and treasurers, sleep well tonight. | 24:54 | |
Professor Samuelson assures you with great probability | 24:58 | |
that after this reconsideration of the surcharge is made, | 25:02 | |
the new team in the United States Treasury | 25:08 | |
will decide that it's in the best interest | 25:12 | |
of long-term growth of the United States | 25:14 | |
not to change it. | 25:15 | |
Now, let me turn, very briefly, | 25:18 | |
to the problem of general tax reform. | 25:22 | |
In a later tape, I'd like to expand on this. | 25:26 | |
But if you wanted to get in mind, very clearly, | 25:29 | |
what it is that typical experts in public finance | 25:33 | |
think is wrong with our present tax system, | 25:38 | |
which loopholes the academic professors | 25:41 | |
of public finance regard as abhorrent, | 25:44 | |
I suggest that you get hold of the report | 25:48 | |
of the Commission on Taxation from our neighbor in Canada. | 25:51 | |
A royal commission was held, it took testimony, | 25:56 | |
it met over a long period of time and deliberated, | 26:00 | |
and it came out with what must be regarded | 26:02 | |
as a splendid report by academic experts | 26:06 | |
in the field of taxation. | 26:09 | |
I may add, just in case I've frightened you by this, | 26:12 | |
by saying that it has not been legislated | 26:17 | |
by our Canadian neighbors, | 26:21 | |
nor do I see any prospect that most of its features | 26:23 | |
will be so legislated because it's too good, | 26:27 | |
in this case, to be politically acceptable. | 26:29 | |
If I were to give a single example of a loophole, | 26:35 | |
which is deemed most inequitable, | 26:39 | |
and the most in need of being closed up | 26:43 | |
by academic experts on public finance, | 26:46 | |
what will leap to your mind | 26:51 | |
is twenty-seven and a half percent oil depletion. | 26:52 | |
Well, that isn't at all what I have in mind. | 26:56 | |
I think that in the words | 26:57 | |
of the Dean of the Harvard Law School, | 27:00 | |
who's now the Solicitor General of the United States, | 27:04 | |
and who may become the Chief Justice | 27:07 | |
of the Supreme Court of the United States, | 27:11 | |
Erwin Griswald, oil stinks. | 27:12 | |
But it's precisely because oil stinks so loud, | 27:15 | |
to mix the metaphor, in the field of taxes, | 27:20 | |
that politically it would be dynamite | 27:22 | |
to remove the depletion. | 27:25 | |
And you may have noticed that in all of the discussions | 27:27 | |
by the Treasury in discussing tax reform, | 27:30 | |
one of the opening depositions have been, | 27:32 | |
we will not, at this point, touch the oil depletion problem. | 27:34 | |
Well, bad says to them for that, but that is the case. | 27:38 | |
The loophole that I have in mind | 27:42 | |
is the loophole in capital gains taxation. | 27:44 | |
If I have General Motors stock and it goes up in price | 27:47 | |
and I don't sell it, | 27:50 | |
I don't have to pay any tax | 27:51 | |
because I have not realized the capital gains. | 27:52 | |
If I do sell it, and if I've held it more than six months, | 27:55 | |
I'd pay tax at a very light rate. | 27:59 | |
Relatively light rate. | 28:01 | |
Instead of my very high marginal tax rate, | 28:03 | |
I pay, in this year, at a twenty-seven and a half | 28:07 | |
percent rate at most. | 28:11 | |
But there's an even bigger loophole | 28:14 | |
aside from my waiting to realize it, | 28:16 | |
until it pleases my fancy. | 28:19 | |
Namely, I can wait until I die | 28:22 | |
and have that General Motors stock pass in my estate. | 28:26 | |
Now, that stock in my estate, | 28:30 | |
like any other item in my estate, | 28:32 | |
will be subject to estate inheritance taxation. | 28:34 | |
I know a thousand gimmicks for lessening that, | 28:38 | |
but that's another story. | 28:40 | |
However, it will escape forever capital gain taxation. | 28:42 | |
My heirs, my widow, my numerous children, | 28:47 | |
will get good old daddy's General Motors stock, | 28:51 | |
which he bought at a price of $1, | 28:54 | |
and which is now worth $100 a share, | 28:56 | |
and has a $99 of capital gains tax liability on it, | 29:00 | |
they get it free of any of that liability. | 29:07 | |
It's just washed out at my death. | 29:09 | |
There's no taxation. | 29:11 | |
Well, you'd be surprised how much | 29:13 | |
escapes taxation ever by this particular loophole. | 29:16 | |
And so, in Canada, they would like | 29:22 | |
to get rid of that feature, | 29:24 | |
and for many, many years, | 29:26 | |
the United States treasury has made recommendations | 29:28 | |
trying to get rid of that feature. | 29:32 | |
It's very important to get rid of it, | 29:35 | |
but the Congress of the United States, | 29:37 | |
which consists of elderly gentlemen in part, | 29:39 | |
who have, themselves, stocks like this | 29:41 | |
or know people like this, | 29:45 | |
have never deemed it, in the interest of the country, | 29:47 | |
to close this loophole. | 29:50 | |
And quite candidly, I don't really think it'll be | 29:52 | |
in a Nixon administration that we see this loophole closed. | 29:56 | |
- | Thank you, Professor Paul Samuelson | 30:00 |
of the Massachusetts Institute of Technology. | 30:02 | |
IDI welcomes your comments, questions, or suggestions. | 30:05 | |
Simply write to: | 30:08 | |
IDI 166th East Superior Street Chicago, 60611. | 30:10 |
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