THE DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220

 

ASSISTANT SECRETARY

JAN «3 1971

Dear Senator Ribicoff:

Thank you for your transmittal of January 4, previously acknowledged
by Mr. Smith, Special Assistant to the Secretary for Congressional
Relations, enclosing the correspondence from Professor Joshua Tederberg
of Stanford, California. Professor Lederberg suggests a modification
in the tax laws to lessen "tax-loss selling" at the end of every
calendar year.

The Treasury Departmenthelieves that tax-loss selling is not a
serious problem either for the financial markets or for the tax system.
In 1970, tax-loss selling exerted very little pressure. During the
last 30 market days, the Dow Jones Industrial Average rose 80 points
from just under 760 to just under 840. On only seven of those days
did the Industrial Average decline.

Tax-loss selling may lead to an increase in the volume of trans-
actions, but it probably has very little effect on the stock averages.
The explanation for this is as follows: Some tax conscious investors
will want to sell at the end of a tax year to establish a loss. Other
equally sophisticated investors will be watching the markets for
signs of bargains. If the price of a stock falls very much, the
bargain hunters will step in and support the market. In addition,
as stock prices begin to fall, the tax advantages of establishing
a loss this year as against next year are eliminated. This also
puts a floor on price drops due to tax-loss selling.

The proposal by Professor Lederberg to allow a declining
portion of any losses realized in January, February, or March to be
applied to the previous year's income, at the taxpayer's option, would
increase the ability of the taxpayer to time the realization of
losses to achieve significant tax savings. As long as capital
gains income receives the very favorable tax treatment which it now
does, there seems to me to be no case for permitting a more
generous deduction of losses. Since the timing of the tax on
capital gains is at the option of the taxpayer, some limitation
must be put on the deductibility of losses. It seems undesirable
to me to permit the taxpayer once he has realized a loss to choose
which tax year to deduct the loss even if only a declining portion
of the loss is deductible against a prior year's income.
Thank you for giving me this opportunity to comment on
Professor Lederberg's suggestion.

Sincerely yours,

the. & Udlan

ohn S. Nolan
Assistant Secretary

   
 

Depu

The Honorable

Abraham A. Ribicoff
United States Senate
Washington, D. C. 20510