Upside-down on Capital Gains
Jude Wanniski
February 3, 1997


Memo To: Franklin Raines, Budget Director
From: Jude Wanniski
Re: Upside-down on capital gains

In your "Meet the Press" appearance yesterday, you made the comment that President Clinton's proposal to eliminate the capital gains tax on all homes sold at a profit below $500,000 would cover 99% of the people affected by the tax. You may be roughly correct about the 99%, but the reason Republicans want the capgains tax cut is to encourage the 1% at the top of the economic pyramid, who possess an enormous percentage of the national wealth, to invest in the bottom tier of the pyramid, where there is the least amount of capital. As a class, African-Americans benefit most by a cut in the capital gains tax, because they have the least amount of capital at their disposal. They have 13% of the population and not much more than 1% of the wealth, most of that in illiquid forms.

This is the reason that of all Republicans, Jack Kemp has always been in the forefront of cutting the capital gains tax. Not to benefit the wealthy, who have their capital gains behind them, but to shift their investments away from low-risk bonds into high-risk equities. This is why Greenspan says the worst way to collect taxes is by taxing capital gains. A lower rate, or an indexed rate or no rate at all is the best way to be sure economic growth is accompanied by productivity growth. A lower rate will cause better-paying jobs to be created. A zero rate would provide the fastest track for wages at the bottom of the socio-economic pyramid to rise to a point where virtually all black men will be able to support a family with one job.