The Clintonomics Watch
Jude Wanniski and David Goldman
February 5, 1993


BILL ROBINHOOD: After a miserable first week as President, what with the Zoe Baird and gay rights hullabaloo, Bill Clinton decided to return to the themes that his political advisors believe won him the presidency to begin with -- bashing "unfair" economics of the Reagan-Bush years. In remarks Wednesday to staff at OMB, President Clinton sounded the tax-the-rich and give-to-the-middle-class themes that flavored his presidential campaign last year:

In the 1980s, the middle class paid the bill while the wealthiest Americans enjoyed the fruits of their labors. Taxes went up on middle class Americans while their real incomes went down. Taxes went down on upper income Americans while their real incomes went up...Before I ask working Americans to work harder and pay more, I will ask the economic elite, who made more money and paid less in taxes, to pay their fair share.

As a counterpoint, the White House floated the possibility that the new economic plan might even put the top marginal income tax rate up to 40%, and there is serious discussion about taxing 85% of the Social Security benefits of "rich people."

Meanwhile, there's less talk of a serious tax on energy, as that is the kind of thing the Sheriff of Nottingham would come up with. Most of this is pure political baloney, driven by Stan Greenberg, Clinton's pollster, and Kevin Phillips, the ersatz Republican who is trying to make class warfare fashionable again. The smart guys in the Democratic Congress are not going to go along with any of this, but will watch from the sidelines as Clinton learns his way around. Senate Finance Chairman Pat Moynihan, who continues to establish himself as the Man-to-Be- Reckoned-With, has been gently ridiculing the trial balloons floating out of the White House on both marginal tax rates over 36% and higher taxes on Social Security. Sooner rather than later, the President will find that his pollster is wrong and the American people are not interested in class warfare and Robin Hood. Clinton was elected President primarily because he wasn't George Bush. (JW)

CLINTON'S CAPGAINS PLAN: There are fresh reports, at least, that the President's team has not abandoned its campaign pledge to cut the capital gains tax for new small businesses. It has been our contention that the Clinton plan, adapted from that of Sen. Dale Bumpers (D-Ark.), was poorly conceived, but that Congress would improve upon it. In this morning's Wall Street Journal, we find Brookings economist Henry Aron's warning that this will happen! The plan excludes half of capgains from taxation for investments held in small businesses for five years, and all tax after ten years. "I have no faith that a modest, circumscribed provision will remain that way," Aaron said. "Special interest groups will march before congressional committees...and pretty soon the plan is expanded a little bit here and a little bit there." Indexation of all capgains is certain to be added. Overall indexation plus a big exclusion for small (or even startup) business would have big economic effects. Consider a Bell Labs engineer now making $100,000 in salary and paying a top marginal rate of 31%. If he quits to start his own company, in effect capitalizing most of his income during the next five years, he cuts his marginal tax rate by more than half. Rather than punch the clock for a 40-hour week at Bell Labs, he will put in 100-hour weeks in his garage. Venture capitalists who might consider funding him, or investors who might consider supporting an IPO, will find the odds shifted in their favor. The dislocations this "targeted" plan would cause to mature corporations like Bell Labs, though, is what ultimately will cause Congress to broaden it out, as Aron says, "a little bit here and a little bit there." A Senate Republican Task Force on the Economy, headed by Sen. Bob Packwood, ranking Republican on Senate Finance, and Sen Pete Domenici, ranking on Senate Budget, is already pondering ways to do this. (DG)

[David Goldman has improved upon our horserace example to explain the debilitating effects of capital gains taxation on entrepreneurial capitalism: "Think of a gambler betting on red and black at the roulette wheel, a 50-50 bet (minus the small house take). According to law, a gambler with a net gain during a year has a tax liability, but a gambler with a net loss has no tax deduction. But no one pays taxes on cash winnings on even-money casino bets. (If a gambler doubled up such bets and won ten times in a row, it would be like winning the lottery. In this rare case, the gambler would attract attention and would have to pay taxes.) If the IRS had a tax collector stationed at every roulette wheel to take income tax out of every winning bet on red or black, no one would play, because the casino cannot afford to shift the odds sufficiently to compensate the players. A capital gains tax works exactly the same way. Investing for capital gains is by definition a wager against the market's present valuation of a capital instrument. Because gains are taxable but losses are not deductible, the tax shifts the odds to eliminate a wide spectrum of bets, i.e., investments. Enforcing tax payments on casino bets would throw croupiers out of work; taxing capital gains throws millions out of work. Reducing or eliminating capgains tax even on a restricted range of investments changes the odds to enable additional bets to be made, increasing economic activity."]