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Yesterday’s market upswing, including a record gain by the NASDAQ,
comes as no surprise to one veteran economist who predicted last week’s
market plunge weeks ago, saying huge capital gains in 1999 precipitated
tax-time share sales in order to pay Uncle Sam.

Jude Wanniski, founder of Polyconomics, Inc. author of the much-celebrated “The Way the
World Works,” and
/news/archives.asp?ARCHIVE_ID=17WorldNetDaily columnist
warned his clients of the impending crash in his March 30 client brief.

Economist Jude Wanniski attributes last week’s market crash to
sales made for the purpose of paying high capital gains taxes.

“The NASDAQ sell-off has me thinking of a connection to April 15 and
the fact that there is no withholding on capital gains,” Wanniski warned
last month. “There was a sell-off last year too, remember, with a bounce
back after April 15 and a flat market for some months thereafter. In
other words, people who took capgains before December 31 now find they
owe Uncle Sam and must sell equities for that purpose.”

Technology companies experienced unprecedented growth last year,
pushing the Dow Jones average over the 10,000 mark and the
technology-heavy NASDAQ to 5,000. The growth has been attributed to
fledgling “dot com” companies whose values have skyrocketed, thanks to
the dizzying expansion of e-commerce.

“There are always many threats to the equity markets … and many
opportunities,” Wanniski told WND. “Markets go up when risks are lowered
and opportunities increase. They go down when risks go up and
opportunities are closed off. The NASDAQ stocks, especially the dot
coms, are especially sensitive to both. They are like “infants,” which
are vulnerable to viruses, but which can grow like mad if they are kept
healthy. That’s why the ‘swings’ in NASDAQ tech-stocks are so wide –
big ups and big downs,” he explained.

“It struck me in late March that much of the reason for the weakness
in NASDAQ stocks was due to increased tax selling by individual
investors who made lots of money by the dot com advances in 1999 … and
who held on to gains instead of selling early to provide cash for IRS,”
he said.

Capital gains are taxed at different rates, depending on whether they
are considered short term or long term. The profit from the sale of an
asset held less than one year is a “short term” capital gain and is
taxed at the same rate as ordinary income. A “long term” capital gain,
however, is the profit from the sale of an asset held for more than one
year. Long term capital gains are given preferential tax treatment,
reducing tax liability.

The former associate editor of the Wall Street Journal told WND that
if tax laws were changed so that “long term” was redefined as a period
of three months, rather than 12, the sell-off may not have happened at
all.

Friday’s record point drop in the U.S. markets has not only fueled
speculation as to its cause — everything from criticism of Federal
Reserve policy to the inevitable bursting of the tech-stock “bubble.”
But it has also inspired economists to issue warnings — as the New York
Times opined on Saturday — that investors should not try to
assign blame to any particular cause of the frenzied sell-off.

“Let’s hope most individuals spend less time playing the blame game,”
exhorts CBS MarketWatch’s Thom Calandra, “and more time hunting for
technology stocks that look poised for a rebound once NASDAQ finds its
feet.”

Edward Yardeni, chief global economist
and investment strategist of Deutsche Bank Securities, calls Wanniski’s
tax-sell theory “interesting.” He adds that he has looked on the NASDAQ
upsurge as a “bubble” — a brief burgeoning market followed by an
equalizing crash — though he said there are “some important differences
between this bubble and previous bubbles.” He believes “the underlying
fundamental outlook for the technology industry is extremely positive.”

Although most Wall Street analysts believe several factors conspired
to cause last week’s record point drop, what is emerging as an
overwhelming causative factor in the analyses of some thoughtful
economists is the Justice Department’s attack on the number-one tech
company, Microsoft.

“Let history record — though this has been widely ignored — that
the market meltdown was brought on by the antitrust judgment against
Microsoft,” Llewellyn H. Rockwell, Jr., president of the
The Ludwig
von Mises Institute.

Llewellyn Rockwell blames the recent judgment against
Microsoft for the market’s plunge

“This was an appalling assault on the company that has done more
than any other to commercialize the information-technology revolution
and make it accessible to the masses. It is not coincidence that the
April 3 news of the judgment sent stocks tumbling, and the market has
experienced fits and starts ever since.”

Rockwell says he does not believe the judgment against Microsoft was
itself the underlying cause of the crash.

“But like the Smoot-Hawley tariff of 1930, the intervention took an
unstable market setting and gave it a kick down the hill,” he said. “In
fact, George Bittlingmayer of the University of California at Davis has
looked at the history of economic downturns in our century and found
that many — 1907, 1919, 1929, and 1937 in particular — were associated
with increased antitrust enforcement.”

Rockwell added: “Why would corporations make investments when the
future of the corporate form was uncertain? Bittlingmayer asks. A
decline in business confidence is a plausible consequence of volatile,
politically charged trust-busting.”

Some analysts believe that when the penalty phase of the Microsoft
matter comes, the tech markets will again experience significant
disruption.

In addition to capital gains sell-offs and the bludgeoning of
Microsoft, another largely ignored factor in the general health of the
technology marketplace is alluded to by Wanniski: Internet taxation.
Much of the market’s rampant growth has been in Internet ventures, many
of which employ electronic commerce. Now that the debate over imposing
a sales tax on Internet sales has reached a boil, some investors may be
waiting to see where the chips fall before devoting more resources to
dot com stocks.

The Advisory Commission on Electronic Commerce submitted its report on Internet
taxes to Congress last week. The panel was sharply divided on whether
or not e-sales should be taxed, and various experts testified such
taxation would suffocate the new industry.

“If my hypothesis is brushed aside and the wise guys decide it was
Greenspan threatening to ratchet up the funds rate, the debate will go
on and on about whether the Fed should do this or that,” said Wanniski.
“Much better if our ‘leaders’ understand the noxious effects of capgains
taxation and the threat to the Internet of taxation of any kind in the
next few years.”

As for the future of America’s economy, Wanniski noted, “There cannot
be a swift bounceback by NASDAQ to the 5000 level because the enormous
revenues that have gone to IRS have not been re-circulated to those
willing to take risks, but to pay down the national debt. But the
blood-letting has stopped and we can now watch the baby start growing
again at a measured pace.”

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