TAX NEWS - JUNE 2010

U.S. Tax: Capital Gains Taxes and the Recovery

Long-term investments should be rewarded with lower tax rates

by SCOTT DAVIS, 04 June 2010 -- There is no question the U.S. economy is showing encouraging signs of recovery. But the recovery is fragile, and we should not do anything that would dampen or jeopardize its momentum. Businesses and individuals should therefore take note that the country is moving inexorably toward an increase in capital gains tax rates. This increase is not being sufficiently debated in Congress but could have a major impact on economic growth, job creation and long-term investment in America.

On Jan. 1, only seven months from now, the top general capital gains tax rate is going to rise to 20% from 15% as previously enacted tax cuts expire. Many do not believe the current administration can leave the rate where it is today because of the budget deficit. But if nothing else is done, the rate will rise to nearly 24% in 2013 under the new health-reform law.

As the president and Congress consider the appropriate capital gains tax rate in connection with tax reform or efforts to reduce the deficit, they have a golden opportunity to assist small businesses and keep America competitive in global markets. How? By applying truly long-term holding periods to the application of capital gains taxes, allowing those who maintain their investments for five years or more to avoid the highest tax rate.

Under this approach, any individual willing to make long-term investments in public or private businesses for five or 10 years (rather than the current one year) would not face the top capital gains tax rate when they retired, sold their company or sold their investment. Rather, the small business owner or individual would be taxed at a lower rate to reward long-term investment. Rate steps could be established depending on the length of the investment. Whatever the specific rates, adopting the concept of lengthy holding periods would support multiple important policy goals.

The 34 million small businesses that employ 141 million Americans are the growth engine of our economy. Other U.S. taxpayers make long-term investments in public and private companies, providing the capital needed to create jobs. And yet if Congress accepts the scheduled increases in capital gains tax rates without changing other provisions, we will be imposing new costs and disincentives on those who can most directly fuel our future success. We should not penalize those who invest for long-term growth.

Even with some of the changes in consumer behavior we saw in 2008 and 2009, the U.S. is substantially behind other industrialized nations in the amount individuals save. Tax legislation that encourages holding investments for longer periods will help close the personal savings gap, thereby creating sources of capital for reinvestment, recovery and a growing economy.

It's time to refocus this country on a long-term view of building commercial enterprises, to reinvest for the future rather than pursuing rapid, short-term profits. This perspective should apply to small and larger businesses.

UPS has focused on long-term growth for 103 years, producing a stability that leads many of our employee-shareowners to hold their stock through their entire career. This has taught us that a long-term view really does ensure better alignment between the interests of stockholders and corporate strategy, creating a foundation for generations to come.

Mr. Scott Davis is chairman and CEO of UPS.