Goodbye Grasso!! Jude Wanniski September 17, 2003

Memo To: All Pension Fund Managers
From: Jude Wanniski
Re: A dimwit and an incompetent!!

[This memo was written hours before the directors of the NYSE called upon Richard Grasso to resign, which he did at about 6 pm EDT. It was clearly the Calpers fund that got the ball rolling. Three cheers for Calpers. JW]

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When Calpers, the California state pension fund, yesterday demanded the resignation of NYSE president Richard Grasso, I cheered!! I cheered again when the New York State pension fund seconded the motion. You should all join the movement, as Grasso is clearly incompetent, or he would never have permitted himself to be paid anywhere near $140 million for a bureaucratic desk job worth no more than $1 million a year, and that is stretching it. The stakes are high in this Wall Street scandal, for if he does remain on the job and collects what he says is owed him, there will soon be federal legislation aimed directly at guys like him, raising the income-tax threshold back to 91% @ $200,000, which is where it was when John F. Kennedy became President in 1960. Workers then hit the 20% rate at $2,000.

When most people hear about a fellow being paid $140 million over a period of years for running the NYSE, they probably assume this has been carefully worked out in the free marketplace -- and Grasso is getting his due. The problem is that they are comparing his "income" as paid in salary and bonuses to CEOs of major corporations who are making many millions in "income" that is paid in relatively small salaries and bonuses, with the biggest chunk coming from capital gains on stock and stock options. There is a world of difference in the effects on the national economy.

In an ideal system, capital gains on options would be not be taxed at all. The only way a corporate chief could get a capital gain on stock would be to help raise the value of the stock in a way that produces a capital gain. There really is no way to do this unless you illegally "cook the books," which means you should go to jail for stealing from the shareholders when the truth comes out.

When I first began helping the original supply-side economists develop a practical approach to taxation from their theoretical framework, I argued that it would not matter if you had a top income-tax rate of 100%, as long as it did not take effect until your salary income reached, say, $1 million a month. Even at $1 million a year, there would be few undesirable economic effects if salary was taxed above that rate very heavily. Exceptions would only have to be made for athletes and actors who take the risks necessary to achieve stardom and big bucks, knowing their careers in almost all cases will be short.

A tax on capital gains is another matter, which is why Fed Chairman Alan Greenspan has consistently argued that the correct tax rate on capgains is zero. Any tax above zero is directly reducing the national living standard, he posits. Ted Forstmann of Forstmann, Little & Co. made the same argument on the Wall Street Journal editorial page back in 1992. We are reminded by them that it is not possible to get a capital gain unless you put ORDINARY income at risk after it has been taxed.

Bill Gates and Warren Buffett have gotten to be the two richest men in the country, if not the world, by virtue of the capital gains they have on paper. The salaries they get paid for managing Microsoft and Berkshire Hathaway, respectfully, are teeny-weeny compared to the WEALTH they have amassed by being extraordinarily successful "risk takers." There are billionaires who achieved that level of wealth from a standing start, by doubling up on their industrial bets, only to make one really bad bet trying to get to the top -- lose it all when blindsided by a dumb political decision in Washington that causes a market crash. Easy come, easy go, they say, looking around for a new stake to try again.

Every national economy depends on the success of a few really great risk-takers in every generation. It is their success in making breakthroughs in industrial or financial technology that are shared by every citizen of the nation, and by extension by every citizen of the world. In no sense has Richard Grasso done anything to earn $140 million, except by "cooking the board of directors" at the NYSE. They have all to one degree or another stolen from all the shareholders of America, for their outsize paydays have come out of the profits generated by your trading in on the NYSE, a market which has been around for a long time, which they had almost nothing to do with.

Once you get warmed up, pension fund managers, you should make a crusade out of this, pushing for a national tax system that really does reward successful risk-taking and taxes cushy pre-cooked paydays at rates sufficient to run the government. When the rate was 91% at $200,000 in 1960, a conversion taking into account the fact that gold was then $35 an ounce and it is now more than $350 would mean a 91% rate at $2 million. At the bottom of the scale, the 20% rate @ $2000 would be 20% @ $20,000. To complete the analysis, though, you would have to make all the adjustments to get from a gross income to taxable income, which means adding in all the loopholes. My father grossed $4000 per year in 1960, but with deductions of $600 each for three kids, he and his wife, and several other allowances for sales taxes and interest, he paid only $3 or $4 a week in taxes. It was JFK who got the ball rolling then, cutting the top rate to 70% from 91%, and slashing the capital gains tax.

Go to it folks. Clean up the tax system, making it fairer and simpler and geared to the formation of capital. Start by making an example of this dimwit Grasso. If you would like my assistance in such a project, I am ready and available, and will charge no more than the market will bear.