Capital Gains in Wisconsin Jude Wanniski January 18, 2000

To: Governor Tommy Thompson
From: Jude Wanniski
Re: Last Minute Appeal

You probably have your state-of-state speech already written for Thursday, but I thought I'd put in a last-minute appeal for an initiative on tax policy -- specifically on Wisconsin's capital gains tax. I think you know I always have admired your understanding of economic issues and your ability to bring disparate groups together through compromise. Against all odds, you managed to do this back in 1987 in your first term as Governor, pushing a 60 percent capital gains exclusion through a Democratic-controlled legislature. The reward for your bold move was a Wisconsin economy that continued to expand right through the Bush recession of 1991.

The results of the policy have bolstered your credibility as one of the most successful governors in recent times. Wisconsin's unemployment rate, I see, is under three percent. Real incomes are rising, job creation is at an all-time high, and the manufacturing base has expanded in your state while many others have declined. In my most recent book, The Last Race of the 20th Century, I describe you as having the best grasp of economics of all 50 Governors because you seemed to recognize that it was crucial for tax policy to encourage capital expansion and the productivity that goes with it.

You thus can imagine how disheartened I was to see you have used a billion-dollar budget surplus to send out rebate checks to voters this year -- while inserting a fourth income-tax bracket in exchange for lowering the top rate by barely a nudge. These zero-sum polices do not change economic incentives to produce or take risks and have no lasting effect on the economy. Can you please explain to me what made you embrace a Ford-Carter tax policy for Wisconsin after such palpable success with supply-side tax cuts?

There was a proposal, I understand, from a State Senator, Margaret Farrow, that would have increased the capgains exclusion to 75 percent. She even has urged state taxation of capital gains be eliminated entirely, that the resulting economic growth would offset any static revenue loss. Really, there is nothing else I can think of that would do more to help continue your economic expansion while successfully dealing with labor shortages, welfare reform, and intellectual brain-drain than dropping the tax. Because you have done it before, you're the one governor who could do it now, as an example to the rest of the states.

It is a shame there is so little leadership among the Republicans who seem to have forgotten the lessons of supply-side economics the party should have learned from Ronald Reagan. George W. Bush almost certainly is going to be the party standard bearer this year, but there is no mention of a cut in the capital gains tax in his program, only Keynesian rhetoric about putting money into people's pockets through a timid tax proposal. You may recall our conversations in 1996, when we tried to get Bob Dole to publicly commit himself to eliminating the capgains tax on inflated gains. Instead, he went into battle with President Clinton with a proposal to cut the marginal rates by a measly 15%, when Jack Kemp and the supply-siders begged him to go with pledge to simply undo the Bush and Clinton tax hikes. Governor Bush's plan is even more timid, even as we now contemplate $2 trillion in budget surpluses in the next decade.

Following Fed Chairman Alan Greenspan's lead, country-club Republicans worry about running out of cheap labor, but that is precisely why the key is to increase the amount of capital available to the labor pool, so the current workforce can be more productive. This, by the way, is the only conceivable way we can solve the longer-term problems in our public and private pension systems.

If Democrats are placing pressure on you to increase spending on education and welfare benefits, is it not more prudent to compromise on a policy mix that will increase the size of Wisconsin's economy in order to raise revenues for popular state programs? If you have to give up spending increases for tax cuts, why not bargain with a supply-side tax cut that helps the economy expand instead of one-time, zero-sum schemes that shift resources from one place to another with no impact on economic incentives?

I believe you instinctively understand these arguments, Tommy. Please do not hesitate to call me if you are in need of further elucidation or assistance. Heck, I'm even prepared to come to Wisconsin in the dead of winter to help make these arguments to your legislative leaders. It's a shame to see you miss this opportunity. As late as it is, I hope you can squeeze something on this into your speech Thursday.