My Call on NASDAQ
Jude Wanniski
April 19, 2000


To: Larry Summers, Treasury Secretary
From: Jude Wanniski
Re: Shorten the Capgains Holding Period

As we no longer run in the same circles, Larry, you may not have heard that I was really the first kid on the Wall Street block to understand the powerful forces bearing down on the NASDAQ stocks, the e-commerce dot.coms in particular. I write to you in the hope that you will realize the correctness of my analysis and urge at least a minimum fix in the tax code. I believe you can eliminate the major source of the problem that causes so many people to suffer greatly in the last several weeks by cutting to 3 months from the current 12 months the holding period required before taxpayers can liquidate capital gains and pay the lower tax rates.

I hope you can appreciate the risks I took in not only setting forth my thesis BEFORE the market opened on Monday, but also advising my Wall Street clients that if I were they, I would jump in on Monday, without fear of further declines. You can find the backup proof of my prescience on my website, at and in an interview I gave to Julie Foster of on Monday afternoon, when it was clear to her that I had been vindicated. The market's advance Tuesday is further evidence that the meltdown last week had little to do with other forces at work -- either the problems at Microsoft or concerns that Alan Greenspan will continue to distort the economy by raising overnight lending rates. On Saturday morning, I e-mailed my analysis and my prediction to the 200 political and financial reporters who are in my e-mail address book. I've found over the years that unless a prediction is widely circulated prior to a major controversial happening in the financial markets, it is ignored, because it would otherwise mean that politicians might be forced to do the right thing to prevent a re-occurrence. In this case, as our Treasury Secretary, I would hope you would be first on your block to ask Congress to cut the holding period on capgains to 3 months.

Or eliminate it entirely. Three months would at least enable the little guy to make his decisions on cashing out on capital gains in order to meet tax liabilities on the previous year with some leeway -- April 15 falls three months and two weeks after the beginning of the taxable year. There have always been squeezes on individual taxpayers who find out too late that they must sell short-term gains in order to satisfy Uncle Sam and the IRS, essentially giving half their "winnings" to the government. There is nothing in my thesis that is especially "supply-side" as opposed to "Keynesian" or "monetarist," so there should be no knock-down debate among competing economic schools -- if you know what I mean. Indeed, liberal Democrats should appreciate the fact that the folks who got hit hardest in the sell-off because of the tax squeeze were the little guys. Those of us who are multimillionaires temporarily lost paper net worth, but did not have to liquidate short-term gains to pay Uncle Sam. We have plenty of long-term gains in our portfolios.

It is because my three children have investments in the stock market that it dawned on me in late March that this phenomenon was a fact of their lives. My daughter is a young public schoolteacher in Morristown, N.J., where I live. She teaches 5- and 6-year-old learning-disabled kids and earns $30,000 per year. Her little portfolio did so well in 1998 that she had to pay federal and state income taxes more than her salary. She also had to pay estimated earnings of $6,000 per quarter against anticipated tax liabilities for the 1999 taxable year. As the end of March approached, she assured me she had paid all her estimated taxes ... and she had. But she had also sold out of her portfolio last year in order to buy a small condominium and furnish it. When on April 10 she went to the tax accountant who helps her each year, she was shocked to learn she owed another $50,000. She had to call her broker and sell that amount late last week, or not be able to get the check in the mail in time to avoid major penalties on top of her tax bill.

If you ask around, Larry, I am sure you will find endless anecdotal evidence that this was what was happening from mid-March on. Not only to Republicans and Democrats, but to Reform Party members too. Reform Party President Pat Choate e-mailed over the weekend that he sold shares in mid-March when he saw the early declines in his NASDAQ gains, and realized he might get caught in the April 15 downdraft. Pat is a sophisticated fellow and avoided the losses. Millions did not, which is one reason why revenues are gushing into your coffers at Treasury, far in excess of what you expected. Please do not infer that Bill Gates has been a big donor to your revenue vaults. It really is the little girls and boys and grandma and grandpa who thought they were doing so well in the market until they got swacked by the capgains tax.

The holding period is nonsense anyway. It is an artifact of the time when Old Guard Republicans who lost money by investing in buggywhip manufacturers and other obsolete enterprise decided that "speculators" had caused their problems, and should be FORCED to hold onto gains before cashing them in. Your predecessor at Treasury, Bob Rubin, helped cause the problem by insisting upon an 18-month holding period in the 1997 tax law. At least this was reduced by six months last year under pressure from Trent Lott, Bill Roth and Bill Archer, or the squeeze would have caused much more distress selling. The people who sold will now have to spend years scraping together their dollars to "speculate" again on the dot.coms.

In fact, I'll cc this memo to Lott, Roth and Archer ... and also copy it to my New Jersey Senator, Bob Torricelli, who understands this wrinkle, as I have been keeping him informed. Perhaps he will introduce the legislation for a 3-month holding period and get the Vice President's blessing too. Hey, when you win at the racetrack, the government does not require you to hold your pari-mutual ticket before cashing it in so you can make another bet. Why does our government insist upon such a silly practice anyhow?