Taxing Wall Street, etc.
Jude Wanniski and David Goldman
January 31, 1992


TAXING WALL STREET: Forcing investment banks to mark their holdings to market for tax purposes may wipe out much of the benefit of the Administration's proposed capital gains tax cut. Wednesday's 47- point slide in the DJIA likely reflected the market's shock at this Treasury initiative as it showed up in the budget released that morning. The market slide had nothing to do with Fed Chairman Alan Greenspan's testimony, which was just fine. Taxation is like a hurdle race: investors must clear a whole range of tax hurdles, including personal income tax, corporate profits tax, payroll taxes, capital gains tax, and so forth. Even a zero capital gains tax doesn't help much if the personal income tax rate stands at 80%, for example. Since the market requires investment banks to issue stock, the tax on the investment banker represents one of the hurdles. By forcing the market-maker to pay tax on unrealized gains, the Treasury plan will force some investment houses out of the market at the margin. Entrepreneurs cannot benefit from a lower capgains rate if they cannot find market-makers to finance their deals. (DG)

STATE OF THE UNION: I watched the President's live address at 5 a.m. Moscow time, not because I was so eager to see it, but because I couldn't sleep. (The jet lag is ugly on these Moscow jaunts.) I was delighted with the time and attention he devoted to capgains, his commitment to a 15.4% rate, and his firmness in announcing he will not take no for an answer this year. The Wall Street Journal this morning credits Vice President Quayle for this major victory over the tax lawyers at Treasury, and he deserves credit for weighing in on this battle. But it simply wouldn't have happened if not for Jack Kemp's behind-the-scenes campaign to rescue the lower rate after it seemed doomed. The rest of the speech on the domestic side was dreary, the President throwing foo-foo tax breaks around like popcorn to the pigeons (the special interest lobbies); none of these will have any lasting good effects on the economy, though none will have very negative effects, either. This was palpable proof, though, of the Beltway's control of the system that former California Gov. Jerry Brown is campaigning against with the notion of a flat tax, the moonbeam idea that would empty out Gucci Gulch and put a good number of the nation's 700,000 lawyers into job retraining. Three-quarters of the way into the speech, President Bush overwhelmed the jet lag with foo-foo popcorn and I finally slipped into a troubled sleep. (JW)

MOSCOW MEETINGS: The first official working sessions of our "Russian Federation Project" could not have gone any better. The meetings were with the senior civil service officials at the Ministry of Economics and Finance who constitute the team. We kept minutes of the discussions and will include a summary in the next "Recommended Reading." These first working sessions covered background, the conceptual approach, and administrative modalities that will govern the operations of the Russian/American teams. The Ministry's Center for Data, Forecasting and Analysis has been named by Yegor Gaidar and Andrei Nechaev to be the coordinating agency, as they will be able to command access to all the information we will need to proceed. These senior professionals were extremely enthusiastic about our central "Action  Plan" concept of stabilizing the ruble via a major gold-ruble bond issue. They had absorbed the material we had sent in the last month and came prepared with excellent questions on how it would work in a way to overcome the skepticism of the population. They supplied us with five tasks, areas they would like us to work on immediately. We supplied them with several requests for data that will be critical to the work, as the data available in published work we've seen is insufficient. We are completely satisfied now that the Government looks upon our enterprise as a serious one that deserves the caliber of attention supplied to it. We have been authorized to explore the feasibility of a gold-ruble bond issue with leading investment banks. The working team thoroughly understands that actual gold is not needed for the plan to work, that gold is simply the necessary numeraire for the state assets that will in fact stand behind the bond issue. (JW)

MOSCOW ITSELF: The situation in the country is desperate. The Moscow population is living on bread and potatoes, as the January 2 "liberalization" has priced protein out of the market. There seems a general fear of how to get meat, even milk, to children. There were, in fact, no prices "freed" on January 2. Instead, the increase in the administered prices acted as a staggering tax increase on the ordinary people. The professionals on the team are well aware that the process has been shifting wealth from the people to the state, when the objective is of course quite the opposite. The level of hostility toward Harvard's Jeffrey Sachs among the civil service is astonishing. Prices in the farmers' markets did not rise on January 2, we were told, as they were already clearing at a rate that suggests about 11 rubles per dollar. (The international exchange rate of about 150 to the dollar reflects the absence of ruble assets attractive to foreign investors, while there is a local spot market for sausage and cabbage that gives the ruble a better rate there.) The good news is that this confirms the ruble was not floated internally, as I feared it would in December, leading to hyperinflation and a breakdown of government. The situation can be rescued. We indicated throughout our meetings that we hoped our enterprise would resolve some of the important differences now dividing the Yeltsin Government and the Parliament. In addition, we explained how a gold-ruble bond issue would work to pull together the Commonwealth instead of fracturing it. I must say, the camaraderie we developed with the Russian team was quite remarkable in the short period of time we had for our working sessions. This surely flowed from our approach, which focuses all attention on improving the well-being of the population, instead of western creditors. One elderly professional assigned to the Russian team told the group in open session: "If we do your bond issue as you describe, it will be the first time in the history of Russia that the government did not rob the people." A nice thought. (JW)