TAX ISSUES: A Beginning

Despite much intellectual backing behind commodity buffer stocks to stabilize prices and incomes, there have been relatively few programs established, and a general loss of favour over the years since 1950.  While we believe that the theory of anchoring prices and letting quantities float is sound, the political and practical application has been problematic.  One alternative measure, is to leave storage of commodities up to the private sector, but promoting the incentives for storage by the government.  This idea has been suggested by Irving Kahn.

Kahn proposes an intermediate policy to Graham's idea of using government storage to dampen the trade cycle, via an extension of the current capital gains tax to cover production goods, along with with an employment scheme,

The IRS in the US currently makes clear what is and what is not allowed to be treated as a capital asset. Our proposal expects to persuade the IRS that any producer that holds some special production off the market until one year or more has elapsed will qualify him as a "trader" and not as a "dealer." The US Supreme Court has confirmed that a "trader", can treat retained product as a capital asset.

Current law taxes capital gain items at 28% of their sales price if held for less than one year, but at only 20% when held for one year or longer.  The top federal corporate tax rate is 38%. A company, holding a product for at least one year, would then approximately halve their tax payment for that item. In making a decision to store inventory rather than sell, consideration will be taken of price risks, storage costs, and the cost of capital for the period held. Only a selection of corporations would be interested in taking advantage of this capital gains tax exemption. These would most likely be large commodity producers or marketing authorities of primary products, which do not suffer from obsolescence or fashions trends.

An addition to Kahn's scheme can be the tying of these deductions to employment. Capital gains deductions will only be validated for production if these funds are spent on new employment for at least one year.  Hiring new workers for at least one year will direct more tax dollars toward the US Treasury than their loss by accepting the long term capital gain tax at 20%, in place of the normal corporate tax rate of around 36%.  The Tax Foundation in Washington has felt that the IRS would consider this tax change to raise tax revenue rather than decrease it.    Unlike using dollars for welfare, "jobs for inventory" creates usable and salable products as well as lower corporate tax payments. Most corporations will prefer to maintain production so as to spread overhead costs. They also gain by re-training skilled workers or using this particular production to train apprentices. Most workers, faced with discharge, would welcome being hired for at least another year. Tying the production designated for the 12-month storage to new workers should also harness union support. 

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Last update October 30, 1998