Mailbag: A Wired Response Jude Wanniski October 28, 1996

Date: October 24, 1996
From: Josh E. Fingold
To: jwanniski@polyconomics.com
Subject: A Sucker for Drucker: [Your letter in Wired]

Dear Jude,

I read your comment about eliminating the capital gains tax in the November 1996 rants and rave section of Wired magazine. I
disagree with your argument that since no industry can make money then you shouldn't have to pay tax. Even if the statement is true that isn't a relevant issue.  People are guessing how these businesses will do. It's a gamble, the same exact thing as betting on a sporting event. While in the long run companies may never make a profit, investors can make profit in the short term.  If you are against the capital gains tax, I'm sure you have heard the argument of where wealthy and poor people make their money, but I'm going to repeat it anyway.  More rich people make money on Wall Street than from wages, while the middle and lower class are the opposite. They work at jobs for their income.  If you remove a capital gains tax, who
is left to pay the extra taxes?  I look forward to hearing a response to this message.

Josh Fingold

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Response To: Josh Fingold
From: Jude Wanniski
Re: Taxing Capgains

The only people who get a capital gain are those who put after-tax ordinary income at risk. That is, they have already paid tax once. If you want people who have surplus income that has already been taxed to invest it in people who need capital, you must reward them, or they will use it to buy a non-productive asset or a safe government bond. A tax on a capital gain is a tax that discourages people of wealth from investing in people who have no wealth, but do have ideas on how to get wealthy themselves. There is nothing wrong with taxing wealth -- which is after-tax ordinary income -- as long as it is being used to consume something or is transferred to someone who had not earned it in the first place.

Think of it another way, as a sporting event, as you say. The tax on capital gains is like a tax on the winning ticket at a race track. People would not go to race tracks if there was an IRS agent standing at the $2 window, when your long shot came in. Because there is no tax on the gain to your $2 capital, an entire industry can function, and the government can tax the tickets to get into the track, the salaries of the jockeys, take a cut of the purse, and tax the property value of the track, and the profits of the track owners. The race track thus produces great income for lots of people and lots of revenue for government. It all comes to a close if you have the IRS taxing capital gains.