Letter to the President
Jude Wanniski
June 19, 1997


The Hon. Bill Clinton
President of the United States
1600 Pennsylvania Ave.
Washington, D.C.

Dear Mr. President:

I appreciated the tone of your interview in The Wall Street Journal this morning, which indicates that you have considerable flexibility of mind in your ongoing negotiations with congressional Republicans on the budget and taxes. It does, though, prompt me to write this, believing you have a misapprehension about the need for a capital gains tax cut and the indexation of capgains.

This comes through especially in your comments about Senator Bumpersís proposal to bring capital gains tax relief to small businessmen and farmers. The only reason small businessmen and farmers want a lower rate is because of the capital gains they already have on their books, gains almost entirely due to past inflation. The problem they have would best be addressed by an executive order from you, instructing Treasury to index capital gains retroactively and prospectively.

You indicated your firm opposition to indexing, on the grounds that it would result in revenue losses in the future. In fact, the failure to index capgains in the 1986 Tax Reform Act has resulted in enormous revenue losses to Treasury and helped defeat President Bush in 1992, for his failure to fulfill his 1988 promise to do so. There is more than $7 trillion in unrealized capital gains that is purely inflationary, backed up at the Treasury tax gate, which small businessmen and farmers are unable to realize because the taxes they would have to pay would ruin them.

If you thought through what I am saying, Mr. President, you would realize that the Government is not entitled to revenues from the realization of inflated gains, which now come only when sales are forced by desperate families. Treasury bureaucrats who argue about revenue losses can see only the $7 trillion outside their doors, lusting for a 28% crack at it in order to balance the budget. They are not expected to take into account these moral considerations, but I believe you agree that you are.

Insofar as future capital gains are concerned, the small businessmen, farmers and entrepreneurs who are the bedrock of American capitalism have little or no direct interest in a lower tax rate on gains. They do not make decisions on entering the fray based on tax rates on capital. It is the capitalist who finances these enterprises who must carefully reckon the after-tax returns on capital put at risk before making decisions that will make capital accessible to new business.

You can take some credit for the flow of fresh capital from the top to the bottom of the economic pyramid in your presidency, owing to your support of Fed Chairman Alan Greenspan. By his keeping the dollar sound relative to gold in his ten years as chairman, he has sharply reduced the monetary risk to capital formation.

Unfortunately, the new capital formed as a result benefits most the established enterprises that rely on debt finance. The Fedís sound policies have helped grass-roots capital formation much less. This requires a rate cut from 28% to lower levels, as Chairmen Archer and Roth propose. The lower the rate, the more Americans who are starved for capital and credit will benefit. It is this reasoning which has led Greenspan to argue for elimination of the capgains tax altogether. For all the good you have done by supporting Greenspan on monetary policy, Mr. President, it is almost as difficult today for people at the bottom of the economy to get capital as it was in 1992.

If you were a man who we could see was set in his ways, his feet in concrete, I would not take the trouble to write this letter. But I have seen that you have kept an open mind on almost all matters of public policy in your presidency, which suggests you might be amenable to reconsideration of these issues as the debate goes forward.

My best wishes to you and the First Lady, and good luck to you on all fronts.

Sincerely, as always,

Jude Wanniski

cc: Mr. Jack Kemp
     The Hon. Bill Archer
     The Hon. Bill Roth
     The Hon. Trent Lott
     The Hon. Newt Gingrich
     The Hon. Dick Armey
     The Hon. Bob Torricelli
     The Hon. Charles Rangel
     The Hon. David Bonior