Tax Simplification: Potential Consumer Impact MacroMonitor Marketing Report Vol. II, No. 10 March 1996

Attitude Toward Tax-Exempt or Tax-Deferred Investments

The potential for the introduction of a flat tax or other simplification or alteration of the tax code either during or immediately after this election year is fairly high. Therefore, it makes some sense to review how consumers have reacted to changes in the past to try to anticipate how they will react to some of the proposed changes.

The vast majority of consumers will adopt a wait-and-see attitude, taking the conservative position of first seeing how the changes will affect their income, investments, and savings before deciding what to do. For many, this attitude means not doing anything for several years.

None of the proposed changes will alter the motivation of consumers to own their homes, save for their children's education, or prepare for their retirement. Therefore, the additional amount in the weekly paycheck will probably go to whichever of these goals is most important.

It is not clear that the elimination of various deductions will, overall, have a dampening or stimulating effect. The projected decline in home values and the commensurate effect on all the connected industries may be offset by the growth of new, first-time purchasers. People's motivations for saving and investing will not increase simply because the interest and dividends are no longer taxed, although their product selections may change. And most people who give to charities don't do so simply for the tax deduction.

The minority of sophisticated investors who decide to take some immediate action may do some switching among types of investments in which they move assets in tax advantaged products to where they may achieve a greater return. However, they will probably allocate these assets among those with higher safety and lower returns along with those for which the risk and the potential for long-term capital gains is greater.