Reuters, the Wall Street Journal, and the New York Post all have coverage of Ralph Lauren's plan to sell a quarter of his stake in his publicly traded Polo Ralph Lauren apparel/fashion/retail empire, with proceeds estimated at between $900 million and $1 billion. The press accounts that give a reason chalk it up to asset diversification. But, as one FutureOfCapitalism.com reader-participant-watchdog e-mailed, what the press is missing is the tax angle.
On January 1, 2011, the tax rate on long-term capital gains is scheduled to increase to 20% from 15%. By selling now rather than waiting until later when the taxes are scheduled to increase, Mr. Lauren potentially saves some significant money in taxes. It's hard to say how much money without knowing what his basis is, but the savings certainly may have something to do with Mr. Lauren's decision to diversify his assets now, rather than, say, three years ago, or a year from now.
It's something for politicians to think about when they raise taxes. People will try to manage their affairs, to the extent that they can, to avoid paying the higher tax rates.The result is decisions on whether to sell stock that are driven by tax considerations rather than the underlying investment merits. Think of the effect it could have on the stock market, if a lot of other big investors with long-held capital gains such as Mr. Lauren all decide to try to unload a lot of stock between now and January 1, 2011.
We're waiting for Senator Levin to haul Mr. Lauren up before a congressional hearing on the theory that the taxpayers are somehow owed payment under the upcoming higher rate rather than the existing lower rate, but that treatment seems to be reserved for the financial industry and the oil industry, not the fashion industry.
Anyway, if Ralph Lauren can figure out that if capital gains rates are going up, it's time to sell stock, probably a lot of other people will realize it too.