Targeted Capital Gains Tax Cuts
Jude Wanniski
August 26, 1996


Memo To: Harold Ickes Jr., Deputy White House Chief of Staff
From: Jude Wanniski
Re: Targeted capital gains tax cuts

You are undoubtedly in Chicago at the Democratic National Convention, but I hope this somehow gets to you before President Clinton engraves in stone a proposal to cut the capital gains tax for a targeted class of income taxpayers. The idea really makes no sense, except perhaps to the Ph.D. economists in the administration. You and I are simple men, without formal training in economics, so you just might understand the logic of my argument on this point.

Surely you remember meeting me at a Charlie Rangel fundraiser at Central Park's Tavern on the Green about four years ago, prior to Clinton's election. All we talked about was the capital gains tax. I tried then, and I try now, to get you to understand that if you are going to "target" the capital gains tax you have to "target" people who have capital. You can't target people who have no capital and tell them they will get a tax break if they invest capital in people who have no capital. Please stop and think about how stupid this idea is. It is not your idea, but the bottom line of assumptions of the Ph.D. economists who advise the Democratic Party. If you want poor people, black people, Hispanic people, ordinary people to get capital, you must target those who have it and are now investing it in government bonds. Cut the capital gains tax and they will invest their capital in the people you and I and President Clinton want to help.

Please look back on the Roosevelt years and you will find that the Congress passed an increase in the capital gains tax at FDR's request, and the depression deepened so quickly that the Democratic Congress cut back the capgains tax to its previous level and Roosevelt allowed it to happen even though liberals insisted he veto it. If I thought for a minute that a capgains cut would benefit the rich at the expense of the poor, I would fight it as hard as you are. Please just stop and think about the argument I am making here then put in a call to Bob Torricelli, who is trying to persuade Panetta to do something about this when the 104th Congress returns in September.

When you talk about cutting tax rates on ordinary income, i.e., labor income, it makes sense to target payroll tax rates or to increase the personal exemptions. There are real supply-side effects as lower rates cause more labor to be offered in the marketplace. Think of how silly it would be to target a lower payroll tax for Bill Gates in hopes he would work harder. By the same token, think how silly it would be to target a lower capital gains tax for people on welfare or unemployment roles. If you want to make a rabbit stew, you must first target a rabbit. If you want more capital to become available to people who do not have it, you must target people who do. This is not something you will find in Paul Samuelson's textbooks, but it is a critical point you should convey to the President.