To: Larry Summer, treasury secretary

From: Jude Wanniski

Re: Lower the Capgains Holding Period

As we no longer run in the same circles, Larry, you may not have
heard that
I was really the first kid on the Wall Street block to understand the
powerful forces bearing down on the NASDAQ stocks, the e-commerce
in particular. I write to you in the hope that you will realize the
correctness of my analysis and urge at least a minimum fix in the tax
I believe you can eliminate the major source of the problem that causes
many people to suffer greatly in the last several weeks by cutting to 3
months from the current 12 months the holding period required before
taxpayers can liquidate capital gains and pay the lower tax rates.

I hope you can appreciate the risks I took in not only setting forth
thesis BEFORE the market opened on Monday, but also advising my Wall
clients that if I were they, I would jump in on Monday, without fear of
further declines. You can find the backup proof of my prescience on my
website, at
and an interview I gave to Julie Foster of on Monday afternoon,
when it was clear to her
that I had been vindicated. The market’s advance Tuesday is further
evidence that the meltdown last week had little to do with other forces
work — either the problems at Microsoft or concerns that Alan Greenspan

will continue to distort the economy by raising overnight lending rates.
Saturday morning, I e-mailed my analysis and my prediction to the 200
political and financial reporters who are in my e-mail address book.
found over the years that unless a prediction is widely circulated prior
a major controversial happening in the financial markets, it is ignored,

because it would otherwise mean that politicians might be forced to do
right thing to prevent a re-occurrence. In this case, as our Treasury
Secretary, I would hope you would be first on your block to ask Congress
cut the holding period on capgains to 3 months.

Or eliminate it entirely. Three months would at least enable the
little guy
to make his decisions on cashing out on capital gains in order to meet
liabilities on the previous year with some leeway — April 15 falls
months and two weeks after the beginning of the taxable year. There have

always been squeezes on individual taxpayers who find out too late that
they must sell short-term gains in order to satisfy Uncle Sam and the
essentially giving half their “winnings” to the government. There is
nothing in my thesis that is especially “supply-side” as opposed to
“Keynesian” or “monetarist,” so there should be no knock-down debate
competing economic schools — if you know what I mean. Indeed, liberal
Democrats should appreciate the fact that the folks who got hit hardest
the sell off because of the tax squeeze were the little guys. Those of
who are multimillionaires temporarily lost paper net worth, but did not
have to liquidate short-term gains to pay Uncle Sam. We have plenty of
long-term gains in our portfolios.

It is because my three children have investments in the stock market
it dawned on me in late March that this phenomenon was a fact of their
lives. My daughter is a young public schoolteacher in Morristown, N.J.,
where I live. She teaches 5- and 6-year-old learning disabled kids and
earns $30,000 per year. Her little portfolio did so well in 1998 that
had to pay federal and state income taxes more than her salary. She also

had to pay estimated earnings of $6,000 per quarter against anticipated
liabilities for the 1999 taxable year. As the end of March approached,
assured me she had paid all her estimated taxes … and she had. But she
also sold out of her portfolio last year in order to buy a small
condominium and furnish it. When on April 10 she went to the tax
accountant who helps her each year, she was shocked to learn she owed
another $50,000. She had to call her broker and sell that amount late
week, or not be able to get the check in the mail in time to avoid major

penalties on top of her tax bill.

If you ask around, Larry, I am sure you will find endless anecdotal
evidence that this was what was happening from mid-March on. Not only to

Republicans and Democrats, but to Reform Party members too. Reform Party

President Pat Choate e-mailed over the weekend that he sold shares in
mid-March when he saw the early declines in his NASDAQ gains, and
he might get caught in the April 15 downdraft. Pat is a sophisticated
fellow and avoided the losses. Millions did not, which is one reason why

revenues are gushing into your coffers at Treasury, far in excess of
you expected. Please do not infer that Bill Gates has been a big donor
your revenue vaults. It really is the little girls and boys and grandma
grandpa who thought they were doing so well in the market until they got

swacked by the capgains tax.

The holding period is nonsense anyway. It is an artifact of the time
Old Guard Republicans who lost money by investing in buggywhip
manufacturers and other obsolete enterprise decided that “speculators”
caused their problems, and should be FORCED to hold onto gains before
cashing them in. Your predecessor at Treasury, Bob Rubin, helped cause
problem by insisting upon an 18-month holding period in the 1997 tax
At least this was reduced by six months last year under pressure from
Lott, Bill Roth and Bill Archer, or the squeeze would have caused much
distress selling. The people who sold will now have to spend years
together their dollars to “speculate” again on the dot.coms.

In fact, I’ll cc this memo to Lott, Roth and Archer … and also copy
it to
my New Jersey Senator, Bob Torricelli, who understands this wrinkle, as
have been keeping him informed. Perhaps he will introduce the
for a 3-month holding period and get the Vice President’s blessing too.
Hey, when you win at the racetrack, the government does not require you
hold your pari-mutual ticket before cashing it in so you can make
bet. Why does our government insist upon such a silly practice anyhow?

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