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At a period when favorable financial statements, increasing carloadings, bloated surplus bank reserves and low money rates point to rising prices on the stock market, brokers, politicians and business men face one vital issue. Can the federal government stop a runaway bull market? Optimists point hopefully at the recent regulations on short sales, the flexible margin requirements, and wide discretionary authority vested in the SEC and the Federal Reserve Board. But as Mr. LeFevre points out in the current Saturday Evening Post, all of these panaceas may prove futile unless the unscientific income tax imposed on capital gains is repealed.
A popular soak-the-rich measure, the capital gains tax places an unreasonably heavy levy on any profits made through the sale of securities on the open market. Briefly, if an investor bought General Electric Common at twenty and attempts to sell at thirty-seven, his seventeen dollar profit is so heavily taxed that he is literally compelled to hold on to the stock. The result is fatal to market stability. At a period of bullish enthusiasm when the number of buyers is unduly stimulated, the number of those who naturally be sellers is artificially restricted.
This danger is peculiarly significant in the current market. For over thirteen months the stock market has been steadily increasing. Yet almost all of the purchases have been made on a cash rather than a margin basis. Manipulation of margin requirements, technical recessions will not affect these holders of securities. And, since the sale of their stocks is made prohibitively expensive by the capital gains surtax, this group will remain on the long side of the market until there is a wholesale loss of confidence with resulting collapse of values. The absence of profit taking on the way up, inevitably accelerates the inflation of values and paves the way for a deflationary debacle.
For two years, President Gay of the New York Market and other financial leaders have been hammering away at the surtaxes as a "potent secondary cause of stock market inflation." In a period when all tax methodology is being reexamined, it would seem imperative in the interests of stability, to repeat the capital gains taxes, and thus remove one more potential factor in a fatal inflationary move.
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