Indexing Capital Gains
Jude Wanniski
May 20, 1997


Memo To: Rep. Bill Archer
From: Jude Wanniski
Re: Retroactive indexation of capgains

It is very encouraging to know how strongly you feel about indexing capital gains, as I saw again early this month, on your CNBC appearance. You have been misled, though, on the issue of retroactive indexation. I noted you said we could only consider prospective indexation because it would cost too much to do it retroactively.

1. This is only true if you allow the CBO/Joint Tax to write the computer program that scores complete indexation of capgains. If left to themselves, they will make assumptions that guarantee revenue losses. Gary Robbins, Steve Entin and others who have studied the issue believe indexation would flood the Treasury with revenues, as ordinary people who are now prevented from selling assets because of the confiscatory tax would be able to sell at a tax rate that only hits real income. Instead of the government getting 28% of almost nothing, it would be able to get 28% of the slice of all assets sold that are considered real income.

2. Because you are stuck with the stupid budget process that requires you to "pay" for a tax cut that would pay for itself at a much higher level of economic growth, you are forced to tax someone else to make up the difference, or cut spending to make up the difference. In either case you create an opponent who prevents you from doing what is right and good. We could change the process to permit dynamic scoring, but many conservative Republicans do not want to see lower tax rates if they produce more revenue. They hate the idea of more federal revenue, because they want to balance the budget by slashing government spending programs. This attitude is what got Newt into trouble.

3. Your problem is solved if we can persuade the President to sign an executive order that would index capital gains across the board. An executive order, you see, would not cost anything, because it would be done outside the budget process. But how could you justify going outside the budget process?

 4. It is because it is universally agreed that it is not right for the government to tax income that is not real. If everyone agrees it is basically destructive and immoral to confiscate a person's property in the name of taxing a capital gain, the argument that it costs too much to stop this immoral act by indexing retroactively makes no sense. The only argument that can be mustered in its defense is that the government needs the money, which is a good argument for permitting me to rob banks.

5. A great effort was made in early 1992 by a small army of Reaganauts to persuade President Bush to sign such an executive order. The same group last year tried to persuade Dole to make such a pledge during the campaign, but he refused to do so without giving a reason. A former assistant Attorney General in the Reagan administration, Charles Cooper, provided all the paper backup.

6. I've written to the President about this and Erskine Bowles asked Larry Summers to invite me to discuss it, which I did recently. I've spoken to Trent Lott and Dick Armey about it. It is my belief that if we give it any kind of push, the President will go for it, because he would make so many people happy that ordinary Americans would not support a Whitewater lynch mob. The only unhappy people will be those Robin Hood liberals who lust after the $6-7 trillion in unrealized capital gains that is pure inflation.

7. If you would like, I'd make a special trip to DC to discuss this with you. Prospective indexation would be nice, but most of the inflationary damage is behind us, which is why the benefits of retroactive indexation would be so great. An executive order by President Clinton is not a fantasy. I've spoken to both Charlie Rangel and David Bonior about it and they are intrigued. Charlie has been telling me for years that he favors indexation and so does Bonior. If we can get all or most party leaders to agree, it could be considered a grand bipartisan idea that the President would find irresistible.