Memo To: Floyd Norris, Diana Henriques The New York Times
From: Jude Wanniski
Re: "Escaping" capital gains tax
Your lengthy December 1 report, "Wealthy, Helped by Wall St., Find New Ways to Escape Tax on Profits," covers a lot of interesting territory and is factually correct. But it is basically misleading, in the sense that all you demonstrate is that there are a variety of ways to collateralize an asset. The variety is obviously necessary to fit different situations. For most of your readers, though, the impression is left that the "rich" are somehow getting away with schemes the government never intended. You speak of "escaping" taxation and "tax avoidance." The word "loophole" appears more than a dozen times. You cite one billionaire as "chuckling" at being able to "have his cake and eat it." All these loopholes and schemes you cite are said to be out of the reach of ordinary Americans, because they are not rich. The foolishness of your premises reminds me about the moron, who, when asked what he would do if he found a million dollars on the street, replies: "I would find out if it belonged to a poor person, and if it did, I would return it."
Any ordinary American who needs ready cash can collateralize the simple assets in their possession. If they own a small house or a plot of land or a portfolio of securities, they can go to a bank and pledge the asset — including the portion which may represent a capital gain ~ getting cash in return. This happens every day of the week and has been going on for as long as there have been capital gains. If they spend all the cash on wild living, and fail to repay the loan, the bank gets the asset and no tax is paid to anyone. In the extreme, the ordinary Joe declares bankruptcy, thereby cheating Uncle Sam out of the 28% owed on capital gains.
The stories you relate of really wealthy individuals avoiding a capgains tax in each and every instance requires the seller of an asset to buy an asset of equal value, as in the case of William Simon's sale of Avis, or requires the holder of the asset to "pay a fee" to a financial intermediary, who is willing to bear the downside risk of the collateral, as in the case of the Merrill Lynch bankers who created a new security to solve the problem of SunAmerica's Eli Broad, the chuckling billionaire.
In the final analysis, to anyone who really knows what is going on, your report recommends the elimination of the tax on capital gains. You might have made clear the tax was created 75 years ago not to raise revenue for the federal government, but to save capitalism from the destructive effects of the 83-year-old income tax. That is, it was designed as a means of excluding from taxable income at least half of all income from capital gains. You might like to call it a loophole. Its destructive effects were seen after WWI, when the top rate on income tax rose to 75% from 4% in 1913, and people who had capital stopped investing it in people who didn't have it. If the 1921 exclusion had been written as a total exemption from tax on capital gains, the federal tax code would not have exploded in the decades that followed into the current mess it is in, 7l/2 million words that require millions of people to collect and administer — the army of lawyers, accountants, investment bankers, etc. who must constantly try to outwit each other in the battle of loopholes.
Your report does a disservice by failing to point out these issues. There is no mention of the fact that there is a great body of argument which supports elimination of the tax on capital gains, because it does vastly more harm than good. Fed Chairman Alan Greenspan is among those who make the argument more forcefully. As long as the Times picks away at this issue exclusively on the "fairness" issue, it ultimately must bear part of the blame for the social pathologies and poverty that grow out of this most insidious of all taxes.