A New York Times Warp Jude Wanniski March 10, 1997

Memo To: Howell Raines, NYTimes editorial page editor
From: Jude Wanniski
Re: Capital Gains Taxation

It is amazing how your economic editorialist can go all these years and still not have a clue about capital gains taxation. Your editorial this morning, urging "No Change in Capital Gains," could have been written 10 years ago, with the writer then slamming the door to his mind on all arguments. Forget my arguments, which you have been getting for as long as we have known each other. Focus on the arguments of Alan Greenspan. Take on his public advocacy of the elimination of the capgains tax, instead of the straw man you set up today. I repeat for the hundredth time, the greatest beneficiaries of a low- or no- capital gains tax are the people at the bottom of the socio-economic pyramid, who have no capital and no access to capital. The people who benefit least are those at the top, who have the capital and refuse to invest it in those at the bottom because the capital gains tax is confiscatory.

Your writer says: "If Congress cuts the tax in half, the after-tax profit on typical investments is likely to rise by no more than 7 percent. That is too little benefit to generate a substantial increase in saving and investment. As a fraction of national output, the additional investment would be minuscule, much less than 1 percent."

Where did this come from? The tax on capital gains applies only to successful investments, which in almost all cases take years to ripen. The only way to get a capital gain is to put at risk after-tax income that derives from the sweat of your brow, physically or mentally. The investment is in the effort of other people, physical or mental. Most such investments fail in the first five years of trying, which means if you are going to attract capital into high-risk initiatives (in the extreme, inner-city blacks), you cannot confiscate the rewards when they appear. The 28% current rate becomes confiscatory after several years of compounding at the annual T-bill rate. Your editorial is based on a fear that someone will get rich by making the right investment. By blocking that investment, you keep poor those who are trying to get rich. A cut in the capital gains tax to 14% from 28% will have enormously beneficial effects at the margin, because the payoff to successful investment will double.

Why do you think real wages have been falling for the last 30 years? When taxes on labor are cut and protected against inflation and taxes on capital are raised and left unprotected against inflation, there is more labor in the mix and less capital. The national living standard declines. The poorest people are shoved underground into a life of crime and social pathologies.

The reason your editorialist doesn't see this is because he was trained in a demand-model, where investment is a given. "Demand creates its own supply." This is why I have been urging you for years to find other work for the Ph.D. economist who writes your editorials. Hire someone who knows less about economics and something about finance — but someone who is at least willing to ask questions. As it is, your economic editorials are caught in a time warp. They can never get any better if questions are not asked of people, like Greenspan, who have answers.