The Daily Workshop Report
by Robert Sheard (TMF Sheard)

HILTON HEAD, S.C. (July 28, 1997) -- The big news for today, of course, is the tax agreement between Congressional leaders and the White House. The agreement calls for the maximum capital gains tax rate to drop to 20% from 28%, saving investors a bundle over the long run.

What does this mean for the short-term approaches we follow in the Workshop? Plain and simple: they have to be even better to keep pace with the longer-term approaches simply because of taxes (not to mention trading costs, both commissions and spreads).

For an investor in the highest tax brackets, short-term gains are taxed as ordinary income at the maximum federal rate of 39.6%. Anything held a year and a day to qualify for long-term capital gains is taxed at a maximum federal rate of 20%.

To get a hypothetical after-tax return of 20%, then, you have to generate a pre-tax return of 33.11% at the top income tax rate of 39.6%. To achieve the same return after taxes at the capital gains rate of 20%, your pre-tax return has to be only 25%. In other words, the bar has just been raised for short-term investment approaches to make them worthwhile.

Depending on your tax bracket, this is something you must keep in mind as you choose your strategies.

On a final note, if you've missed the news all day, DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> split 2-for-1 today. Fool on!

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