The WSJournal's "Outlook"
Jude Wanniski
July 15, 1997


Memo To: Alan Murray, WSJ Washington Bureau Chief
From: Jude Wanniski
Re: Your Monday “Outlook” column

Your once-a-month turn at the Monday Page One “Outlook” column yesterday contained more than your usual number of errors. 

1. You state that the budget deficit would fall faster if Congress took the summer off instead of passing the budget legislation. The deficit is falling rapidly because of the tax increases of 1990 and 1993, you say, and will fall more rapidly if the Congress does not cut tax rates on capital gains. In fact, the tax increase of 1990 caused the recession that followed. This reversed the trend of the Reagan years, in which the deficit as a percentage of GDP was declining. As GDP fell below its projected trend, the deficit climbed as a percentage. The 1993 tax increase left the capital gains tax at 28% and raised the  income tax rates on higher incomes. These higher rates did not produce the higher revenues projected and even today are not yielding what was expected of them. Certainly the decline in the deficit is not the result of surging revenues in the income classes above 28%. In other words, Alan, if you checked the numbers, you would find that the dramatic decline in the deficit has very little to do with revenue increases in the higher income classes. Indeed, revenues from capital gains realizations remain far below all the projections since the rate was increased to 28% from 20% in 1986.

2. You say the budget exercise has nothing to do with economic growth. “The supply-side notion is to cut marginal income-tax rates and thereby increase incentives to work, save and invest. This tax bill doesn’t do that.” Wrong. Cuts in marginal income-tax rates are meant to increase production by increasing the after-tax rewards to production, a process that can only work if the rates are higher than they need to be to produce a desired level of tax revenue (The Laffer Curve). If production is increased in this fashion, consumption and savings/investment will both increase. 

3. You say the main effect of a cut in the capital gains tax is to increase the incentive for people to invest in the stock market, and with the Dow near 8000, why bother? The reason for cutting the capital gains tax is not to encourage people to buy stocks, but to give them an increased reward for successful risk-taking in the enterprise of others, which is the basis of entrepreneurial capitalism. The stock market began its latest rise after the November elections as it began discounting both the reduced risk to capital investment by a careful management of monetary policy at the Fed, and by the likelihood of a successful budget deal. The recent surge in NASDAQ and the high-tech stocks are the market’s way of capitalizing the growth effects of a lower capital gains tax. If Congress went home, Alan, the market would collapse to where it had been last November and the budget deficit would climb right back up. 

4. You say “The constraint on growth these days isn’t coming from the capital markets: It’s coming from the labor markets.” Now this is about as silly a statement as I’ve ever seen you make, Alan. Growth may have been constrained by a shortage of labor in the Stone Age, but once civilization began, growth has only been constrained by a shortage of capital. The idea that we can only grow faster by importing labor from the rest of the world is shocking in its ignorance of the way modern economies are built. Why not import a million mules?

5. You then say the two other big tax cuts in the bill -- a family tax credit and an estate-tax cut -- do nothing for growth. The first will cause people to have more children -- but that presumably means we will have faster growth when the kids grow up to replace those mules we have imported in our current labor shortage. The estate-tax cut, you say, simply “makes death a little less stressful for the affluent.” This flip comment belongs in a school newspaper, not in the WSJ, and certainly not by its Washington bureau chief. An estate-tax cut has economic effects. 

6. Your discussion of “tax fairness” also belongs in a school newspaper. For all the years you have been around, Alan, you should have learned by now that there is a difference between the incidence of a tax and the burden of a tax. A market is composed of buyers and sellers, with the buyers one day buying, the next day selling, and the sellers vice versa. If the buyer is a poor person and the seller is a rich person, putting a tax on the rich person’s sales increases the price to the poor person. If you have a sick person and a doctor, taxing the doctor puts his service out of the reach of the poor person. This means you have to tax the doctor twice as much, so you can give the poor person enough money to buy the services of the doctor. If you tax the poor too heavily, they will go underground or throw themselves on the mercy of the rich. If you tax the rich too much, fewer people will become rich and the burden of taxation will fall on the poor. I know I’m oversimplifying, Alan, but eventually I will get to a level of simplification that you may be able to grasp. 

7. The 1986 tax bill, you say, was “based on the notion that two families with roughly the same income ought to pay roughly the same taxes.” A family at the beginning of life earns its income from salary, which is taxed, and saves for the end of life with after-tax income, i.e., wealth. If you tax the elderly family which is drawing down its wealth at the same rate you are taxing the young family which is earning income, you are only taxing the elderly family a second time on the income it earned the first time. This may be what you had in mind when the 1986 tax bill was enacted, but it was not what President Reagan had in mind. He believed the incentive effects of sharply lower tax rates on income, which would be protected against future inflation via indexing, would more than offset the higher tax rates on selected capital investments (loopholes) or capital gains, which were not indexed. At the time, you surely remember, we supply-siders argued that the negative effects of the higher, unindexed capital gains would accumulate and damage capital formation. We persuaded George Bush to campaign on a promise of an indexed 15% capgains rate, but once elected, he broke his promise, encouraged every step of the way by the WSJ’s Washington bureau.

8. You say “President Clinton is right to focus” on post-secondary education “as a key to the nation’s long-term economic health,” given the fact that educated people have higher incomes than uneducated people. Here is more sophomoric prattling, which belongs in a school paper. The USSR focused on post-secondary education. What good did that do it? India has been focusing on post-secondary education for 50 years, and all it has done is produce human capital that has emigrated to the rest of the world in search of opportunity. Education without opportunity translates into underemployment, Alan. For you to say Clinton is “right to focus” on it is mindless editorial jibber-jabber.

The “Outlook” column was never meant to be political or ideological screed, to compete with the Review&Outlook column on the editorial page. Even if you knew what you were talking about, Alan, it would be inappropriate for you to blab-blab-blab editorial opinion on Page One of the Monday Journal. The several million readers of the Journal look to the Outlook column on Monday for a head start on the week. It devalues the product to give them gibberish instead.