Memo to Senator Daschle
Jude Wanniski
January 28, 1997


Memo To: Sen. Tom Daschle, Minority Leader
From: Jude Wanniski
Re: Capital Gains Tax

Caught you on CNN's "Evans & Novak" this past weekend and heard you put down the idea of a broad-based cut in the capital gains tax, saying you prefer a "targeted rate," so the rate cut would benefit the people who need it the most. You have things upside-down, I'm afraid. You cannot help poor people by targeting them, because they have no capital on which they can gain. The purpose of cutting the rate is to induce people who have capital to invest it in people who don't have it. I know you have the best intentions in taking your targeted position ~ which has been Democratic litany for many years. The last Democrat who understood its importance was President Kennedy. I was happy to see President Clinton saying he is more favorably disposed than many other Democrats.

The central problem you have, as a political leader, is that most academic economists who are aligned with the Democratic Party are "demand-side" economists. They have been trained to observe the economy move according to the behavior of consumers, not producers. They have a hard time understanding that you can target a worthy group until the cows come home, and no capital will flow to them if the investor is excluded from the gains on the capital he is putting at risk. The more you narrow or target this kind of tax cut, the less effective it will be. You can cut a tax on income for the poor and it can have the desired effect. You cannot do it with capital gains. Remember, it is only possible to have a capital gain if you put after-tax ordinary income at risk. There is no other way.

In this morning's NYTimes, there is a front-page piece about how the President wants to give tax credits for businesses that hire welfare recipients. This is the worst kind of government intervention, the kind that came from "bleeding heart liberals" at the peak of that era. It is wonderful to think that you can specifically target a government tax policy that will put bread in the mouths of widows and orphans, but it almost never works. The beneficiaries are generally the scavengers who find a way to milk that program for all it's worth. A broad-based capital gains tax cut, indexed for inflation, would have employers beating the bushes for workers.

You really should read Felix Rohatyn's piece in the WSJournal of last April 11, in which he confesses to being a fellow who thought the tax system should be used for social purposes. Get the tax rates at an optimum for production and revenues, and the government can then optimize its spending policies to bring about an equitable system of relief to the poor, the lame and the halt.

I've written a long paper on a "Bipartisan Framework for Tax Reform," which I sent to my clients in the last week. Among those who received it are Senator Lott and New Jersey Senator Bob Torricelli. As one of your newest Democratic charges, Torricelli has come to understand that targeting rate cuts will not do the job. You might hear him out.