"Nothing happens until somebody sells something."
No doubt you've heard this tired truism offered up at times of trial during your
business career. There's a funny thing about tired truisms ... they are generally
true.
Actually, things start to happen right before somebody sells something. Ever sold
a car? Bet you washed it and vacuumed out the floorboards on the day the classified
ad ran, after living with the dirt under your feet for a year or so. Ever sold a
house? Bet you touched up the paint around the garage door and the front porch.
Same goes with businesses. Usually, firms or divisions are never in better shape
than when they are about to be sold. Bills get paid. Slackers get fired. Offices
gets cleaned up. Warehouse shelves get shaped up. Inventory goes up a little or down
a little, depending on what's desirable.
Same goes for the buyer's side. He buys your car and immediately heads for the
nearest car wash. She buys your house and immediately gets out the paint. He buys
your business and immediately begins to expand here, consolidate there, fiddle with
the inventory .... oh yeah, and he fires a few slackers.
Selling and buying businesses is a good thing. Much like relocating, the prospect
of selling creates an opportunity for the business to be viewed temporarily through
more objective eyes. With few exceptions, the businesses are more sound and the employees'
opportunities more solid after the transaction. You might think we as a self-governing
people would encourage
this activity.
Instead, we tax it.
Enter the familiar "Capital Pains" tax.
Taxes aren't all bad, and not every tax is automatically too high. But this one
is. You will be told that the capital gains tax is being reduced from 28 percent
to 20 percent. Actually, cooler feet prevailed and the tax will be lowered only to
25 percent in "some" -- read that "your" -- situations.
The other bad news is that there are now a dozen or so different kinds of capital
gains. It's so complex that one tax form -- alternative minimum tax -- will require
22 new lines on it because of capital gains tax changes.
But what about indexing for inflation? If you have owned this business for 20
years or more, you owned it during a time when inflation was running wild. In some
cases, 28 percent of today's dollar gain might exceed your real gain over time. That's
paying the government for the privilege of doing all that work and taking all that
risk.
1997 will be remembered as the year the capital gains tax was lowered. But it
won't be lowered enough to actually encourage business growth and it won't be indexed
to inflation. Too bad.
The capital gains tax is a slow-growing brain tumor inside your vibrant and expanding
business. The longer it goes untreated, the larger the section of your brain it will
occupy. The doctors in Washington just wrote you a prescription for two aspirin.
My advice? Take the two aspirin. It's all you're going to get right now anyway.
But make sure you call the doctor back in the morning, as the saying goes. You're
going to need something a lot stronger to stem the capital pains of this tax.
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