Memo To: John Kasich, Chairman, House Budget Committee
From: Jude Wanniski
Re: Rewarding risktakers
I had the pleasure of catching you on Chris Matthews "Politics" show on CNBC last night, a marvelous interview. Matthews is one of the best interviewers in broadcast journalism and he did get a lot out of you. Here are a couple of thoughts I came away with:
1. I am eager to hear more about your closing comment that you intend to challenge President Clinton's extension of the U.S. troop presence in Bosnia. This is one of the most important debates we should be having, one that eluded us in the recent presidential campaign because Bob Dole simply refused to raise a finger against the commander-in-chief. I am in emphatic agreement that the United States should not be solving problems that belong in local or regional jurisdictions. This is a post-Cold War issue that deserves the most serious attention. You will not find yourself a popular man in the military-industrial complex for raising these questions, just as your opposition to the B-1 bomber had you in the cross hairs. But I congratulate you for ignoring these risks to your political career. Your risktaking will be rewarded in this case, I think.
2. You mentioned the need to cut tax rates to reward risktakers, i.e., small businessmen. This can best be done by indexing the capital gains retroactively, as Jack Kemp has been arguing for many months. He even persuaded Dole to agree to do this via an executive order if elected President, but he could never get Dole to take the lead in saying so publicly. We should try to rally the governors to recommend this be done, either by executive order, or by legislation early in the session. This one act releases $7 trillion of unrealized capital gains that is pure inflation from the threat of a 28% tax liability — $2 trillion of tax relief in one swoop, almost all of it benefitting the little guys who own farms, ranches, shops, mills and mines. Those we call "rich" have generally accumulated wealth that contains little or no inflated gain, because they do so by trading within the calendar year.
3. The real benefit of cutting the capital gains tax rate is that it encourages passive investors in government bonds or unproductive assets to invest in entrepreneurs who are starved for capital. If we increase the rewards to people who take risks in other people, we will release an enormous amount of unrealized human and intellectual capital — people who are now underemployed because of the shortage of capital available to them at the grass roots.
4. You noted with concern the trade deficit. That is not something you need worry about. As the federal budget comes into balance, the U.S. trade deficit will do so as well, and soon go into surplus as foreign holders of U.S. assets begin to draw on the income streams from those investments. The best thing we can do to encourage a smaller trade deficit or a trade surplus would be to help the developing nations learn how to grow via entrepreneurial capitalism. When Mexico was growing rapidly, it was running a trade deficit with us. When our Treasury economists pushed Mexico into a peso devaluation, it caused a major recession there, and the trade deficit with us turned to our trade deficit with them — as a million illegal emigres came across the border bringing their savings with them.
5. By the way, we look forward to seeing you at our annual client conference in Boca Raton, Fla., Feb 27-to-March 2. The Chinese Ambassador to the U.S., Li Daoyu, has accepted our invitation. We can kick around the trade deficit with him when we get together.