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As Japan Agonizes Over a Tax Cut, We Take Our Own

July 05, 1998|TOM PETRUNO

Here, in edited-for-TV form, is how it went last week in currency trading as the market wrestled with the idea that Japan might actually have a serious plan for ending its long economic nightmare:

* Tuesday. Japan: "Hey, we have a serious plan for ending our long economic nightmare! You'll see!" The dollar plunges from 141.86 yen to 138.77 yen.

* Wednesday. Japan: "You won't believe how serious we are! Really!" The dollar falls further, to 137.90 yen.

* Thursday. Japan: "Here are the details of our very serious plan! How do you like it?" The dollar rockets back to 140.99 yen.

* Friday. Japan: "This isn't enough? OK, perhaps we will be even more serious and do still more." The dollar slides to 139.35 yen.

The "more" might be permanent income tax cuts, which is what the United States and others with a vested interest in Japan's future have been urging for a long time. If you want to get your country out of depression, after all, get your people to stop thinking that they're depressed.

How? Why, get them into the malls, of course!

It certainly works in America, and now that we're again the undisputed economic king of the world (the position formerly held by Japan about 10 years ago), what's good for America ought to be accepted as good for everybody else, and especially for seemingly clueless Japan.

And so on Friday Japanese Prime Minister Ryutaro Hashimoto, being as direct as a Japanese politician can ever be, told his countrymen that "we will review the state of income taxation, leaving no sanctuary."

While the Japanese are, shall we say, talking about discussing the potential possibility of a tax cut, Americans are getting one. Or at least Americans who choose to cash in some of their appreciated securities are getting one.

The U.S. House has already voted to reduce the holding period for long-term capital gains to 12 months from the current 18 months. The Senate is expected to follow suit later this month, and President Clinton apparently has no qualms about going along with the program.

Now, it was only a year ago that Congress voted to lengthen the long-term capital gains period from 12 months to 18 months, which meant that if you wanted to pay the lowest possible capital gains tax rate (20% for most investors), you would have to hold your securities 50% longer than before.

As it stands now, if you sell a security held between 12 and 18 months, the maximum tax on any gain is 28%.


With the proposed change in the law, any security sold after Jan. 1 of this year will qualify for the maximum 20% rate as long as you've held it 12 months.

So there's your tax cut, America. On one hand, it's discomforting to think that Congress now apparently believes it's OK to change the capital gains period yearly, as opposed to every few years, which used to be its practice.

On the other hand, there seems to be little else to do in Washington these days, unless you're on somebody's grand jury. So if they want to give us a tax cut, let's be appropriately thankful.

One wonders, though, whether Texas Republican Bill Archer, who led the campaign in the House to roll back the capital gains holding period, might be trying to send a message to his stock-holding constituents. Something like, "Listen, I'm giving you the chance to get out of the market sooner, and at a lower tax rate. Take the hint!"

Or perhaps Rep. Archer senses that America will soon need this tax cut to keep the malls, the new-car lots and the suburban subdivisions packed with buyers.

Data last week gave the strongest indication yet that the U.S. economy is slowing from its torrid pace of the last year.

A national index of manufacturing activity in June fell to its lowest level in two years. While the General Motors strike had a big impact on that index, other reports corroborated the idea that economic activity is weakening on a broader scale.

Construction activity, for example, fell 1.5% in May. And the number of jobs created in June slipped to 205,000 from 309,000 in May, mainly the result of a slowdown in the manufacturing sector, which reflects the drag of the Asian crisis.

Isn't a slowdown exactly what Federal Reserve Board Chairman Alan Greenspan thinks we need? You bet. And the bond market seems to be a believer: The yield on the benchmark 30-year Treasury bond ended last week at 5.60%, down from 5.63% a week earlier and just above the historical low of 5.57% set June 15, amid the last Asia-induced market panic.

Yet some economists advise against betting that this slowdown is anything more than a temporary ebbing of activity. Consumer confidence, analysts note, is at a three-decade high in the United States. What's more, the service sector of the economy continues to add jobs at a brisk pace, despite the manufacturing slowdown. And this is, after all, a services-based economy.

More important, it's an economy that moves largely according to consumer spending patterns, since that consumption accounts for two-thirds of total activity.


As long as we're happy and spending money freely, chances are the the U.S. economy is going to grow.

"The consumer has never voluntarily stopped a spending spree," said Suresh Bhirud, strategist at investment firm Bhirud Associates in Stamford, Conn. "In other words, you have to take the money away to curtail spending"--by raising interest rates, for example.

So thanks for the tax cut, Rep. Archer, but it doesn't appear to be needed yet. With the U.S. as Japan's self-appointed role model, however, the cut does set a good example for the Japanese government.

Not that Japan needs a capital gains tax cut. It would only be useful for investors with capital gains, and with Japanese stocks still 58% below their 1989 peak, gains in general in Japan are in rather short supply.

Tom Petruno can be reached by e-mail at

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