Investing for Productivity and Prosperity (1994) / Chapter Skim
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Conclusions and Recommendations
Conclusions and Recommendations
Pages 34-38
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From page 34... ...
On a shorter time horizon, we believe that the following steps should be taken to encourage productive investment. First, Congress should progressively reduce the subsidy on residential real estate by eliminating the deduction for interest on future mortgages above an amount (e.g., $200,000 to $300,000)
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From page 35... ...
Relative to other countries, the United States, through its double taxation policy, penalizes equity investment and increases the wedge between the cost of funds and the cost of capital, a condition that has prevailed for some time but attracted considerably more notice with the emergence of aggressive foreign competition and the decline in the growth rate of productivity.20 This double taxation is mitigated by three factors: corporations retain income, thus deferring the tax; financial investors can defer taxation of the capital gains portion of the return by holding the stock; and there is a class of tax-exempt or tax-deferred investors, primarily pension funds, that are in whole or in part relieved of the corporate income tax. Nevertheless, the double taxation penalty on taxable income flows at today's higher marginal personal and corporate tax rates can be quite dramatic.
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From page 36... ...
The 1986 act had essentially eliminated the differential between capital gains tax rates and those for ordinary income by reducing the marginal rate on ordinary income. Because the 1993 act again widened this differential for all types of capital gains by raising the marginal rates, it is now justified to mitigate this by the particular type of targeted reduction for long-term holdings recommended in this report, to lengthen time horizons and thus help growth and risk taking.
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From page 37... ...
These measures include communicating effectively about the goals and direction of the company to internal and external constituent groups, primarily stockholders, establishing close relations with suppliers and customers, avoiding excessive diversification, promoting significant employee ownership, and adopting more effective employment practices that reduce turnover and upgrade employee skill levels. A second class of reforms encourages managers and directors to focus on the long-term performance of their firms by increasing their longterm equity stakes in their companies.
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From page 38... ...
There are several ways that capital market policies could encourage investors to seek and receive more information needed to develop confidence to support long investment horizons and to hold substantial equity stakes longer term.24 More flexible capital market policies could encourage the growth of investment institutions oriented to long-term, committed, active ownership of substantial equity stakes. Currently, several laws and regulations are quite rigid in limiting institutional investors to diversified small takes in companies.
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