Dr. John D. Sanders • 843-491-6060john@johnsanders.com

"Capital Gains"

The elections are over, and another round of discussions on tax cuts are beginning for the new Congress. In every report there are the pros and cons about cuts in the capital gains tax. Some countries have no tax on capital gains-- the U. S. currently treats these gains the same as regular income, although there is currently a 28% top rate. Should the rate be lowered; should capital gains be indexed to inflation over the time period held; should the top rate limit be eliminated? And, why is this discussion important to marketing of technology?

Certainly the first thought in anyone’s mind when writing a check is that the money is gone from the checking account. However, this check writing may be because of a frivolous expenditure, purchase of equipment useful in business, payment of critical marketing costs, development of a new technology, or buying an equity interest in a developing company. Therefore, the check is either for an expense or an investment-- and hopefully the check writer know which it is when the check is written. (Sometimes what we think is an investment turns out to be an expenditure with no return, and occasionally an expense produces a nice positive return.)

The climate for investment now though the stock market can only be described as "very positive." With the market averages hitting new highs almost every month in 1996, the amount of capital that has been created is enormous. The economists continue to debate whether a lower capital gains rate will encourage more selling of high priced stock, and therefore produce an actual increase in the amount of taxes collected.

But more important directly to professionals in the marketing of technology products and services is the inclination of business to invest in the future. If an investment takes several years to mature and the gain from this investment is taxed at the same marginal rate as current income, then the value on the use of money has been diminished by inflation (without even taking additional consideration for the risk). Must managers only consider the decision for new markets or products as "expenses" that reduce the net profit, or is there cash flow value in weighing the development of a new product or service that will produce profits a few years down the road. These are not easy relationships and the use of capital (as well as the management of expenses) requires knowledge of the accounting and tax issues as well as the experience and judgment of the basic investment.

On a more personal note, let me expound about this issue of capital gains-- "The American Way." The creation of wealth in this country is truly moving from physical assets method to one of information technology. It’s too late to start a railroad to have a huge multiple on capital. It’s almost too late to buy a farm and attempt to build it up and sell for business reasons. Real estate investment has finally come to the realization that more of the value is in the people occupying the offices, then in the actual value of bricks and floors. The tremendous growth in value of companies with technological products and services that have produced these large capital gains in the stock market are the results of combining new technologies with aggressive organizations and strong marketing forces.

Every individual in the United States should recognize that it’s nearly impossible to "become wealthy" from a salaried position. Assuming you don’t inherit a bunch, the only way is through investments and capital gains. And, after investing over a long period of time-- or through the accumulation of hard work and insights, along with the risk of capital-- one makes that major hit, then how much should the gain be taxed? How much does that tax rate affect your decision to sell, or even to invest in the first place?

I would appreciate comments; contact me at Technology Transfer Business magazine: phone: 703-848-2800, ext. 151; e-mail: john@johnsanders.com; internet: www.johnsanders.com.

prepared for the December, 1996 Issue of the FLC NewsLink