Mailbag: Taxing the Rich Jude Wanniski October 22, 1996

I received this letter by e-mail yesterday:

Date: Mon, 21 Oct 1996
From: Nicholas Hart
To: jwanniski@polyconomics.com
Subject: WIRED letter

I am writing in response to your letter that was published in the November issue of WIRED magazine.  Perhaps you know much more than I about economics (I have only had about ten weeks each of micro and macro at the University of Washington) but I feel that one of the assertions in your letter is grossly inaccurate.

You wrote, "in a thriving capitalist system, there is more failure than success.  It's also why there should be no capital gains tax -- [because] over time, there is no net capital gain."

One of the things one of my economics instructors told me, and that I believe to be true, is that economics illustrates how a policy affects the economy, and it does not tell us if that policy is moral.  In my mind, the purpose of the capital gains tax is to take a certain measure of capital from investors (typically "the rich") and let the government use it to fund programs for the rest of the nation and particularly for services that help people that cannot afford to invest (typically "the poor.")

I am not saying that I agree with the capital gains tax --  I'm not sure if it is a "fair" and effective way of generating revenue.  But I do agree with the ideal that I believe it is in place for --  take some money from people that have plenty and give it to those that do not.

Thanks for your time!
Nicholas Hart

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Response to Nicholas Hart from Jude Wanniski - 10/21/96:

I did not argue that you should not tax the rich. We should of course do so before we even think about taxing those who are not. The question is, how do you tax the rich? At what point? Do you get it from them as ordinary income, which has never been taxed? Or do you tax their after-tax income, which has been taxed once? Or do you tax them on the sale of successful investment of after-tax income, which means taxing them on capital gains?

It's like a horse race. You can tax the income of the owner of the horse, you can tax the jockey, you can tax the purchase of saddles for the horse, or you can tax the prize for winning the race. Since the only people who get the prize are the winners, you would only get a small amount by taxing the prize, and you discourage everyone who thinks of running in the race. That means you get less revenue from the jockeys, the owners, the saddles, etc.

All taxes are not created equally. You want to tax the rich. You do not want to tax success.

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(Website fans: My original letter to WIRED, to which Mr. Hart responded, follows)

July 31, 1996

Memo To: Kevin Kelly, Wired editor
From: Jude Wanniski
Re: Peter Drucker interview

Congratulations on your Peter Drucker interview. Hope you don't mind that we sent copies to all our clients with a "recommended reading" instruction. Drucker is phenomenal. At his age still coming up with such great insights. The idea that industries don't ever break even is one I've held for years -- from the days I was at The Wall Street Journal editorializing on the energy crisis. In fact, more money has been spent looking for gas and oil than has been recovered from the sale of the stuff found so far. Think of how much investment there has been in writing books and how little has been recovered by authors and publishers. This is because in a thriving system of capitalism, there is more failure than success. It's also why there should be no capital gains tax -- because over time, there is no net capital gain. To get investors willing to lose more money on wildcat projects than they are likely to recover, you cannot burden them with a capital gains tax that reduces the net from a point below zero.

We read all kinds of stuff here at Polyconomics. To come across a Drucker interview in "Wired" is another reminder of how little net return we get from our investment of time in the business magazines, which should be giving us these kinds of reports. My thanks for your initiative.