Letter to Senators and Congressman

As you discuss tax reform, at the top of your list should be eliminating the capital gains tax. In general, capital gains should be taxed as ordinary income. It is the main reason that many wealthy people pay a lower tax rate than ordinary people. Warren Buffet often cites the example that his secretary pays a higher tax rate than he does. Basically the capital gains tax is welfare for billionaires.

Yesterday, former Reagan budget chief David Stockman called for reform of the capital gains tax on Fareed Zakaria's GPS program on CNN. He said that it made some sense when inflation was high, so that capital gains merely reflected inflation and not an increase in the real value of an asset. But today, there is virtually no inflation. The other justification is that it encourages new business. There is some basis for that. Perhaps, people who start their own businesses and true venture capitalists should get some kind of tax break to encourage them, although most venture capitalists are multi-millionaires. But someone who buys Apple stock at $200 and sells it a year later for $300 hasn't really encouraged entrepreneurship. A favorable view is that he made a good investment; a less favorable view is that he was just gambling and made a winning bet. Why should this country encourage gambling over doing a hard day's work as an engineer or waitress?

Earlier, I wrote you suggesting the gradual elimination of the home mortgage tax deduction, because it unreasonably favors homeowners over renters, especially if the homeowners paid no money down and have no equity in their homes. They are essentially renters, but get a homeowner's tax break. It might be fair to continue the deduction for people with substantial equity in their houses. Building up equity is the saving which the deduction was originally intended to encourage. But the subprime housing crisis illustrated the economic dislocation that the tax deduction helped create.

My Meeting with Kissinger

Kissinger's new book "On China" reminds me of the only time I met him. As a young Foreign Service officer on his second assignment, I was working in the State Department INR watch office, which monitored incoming intelligence reports. While he was Secretary of State during the Ford administration, Kissinger was holding Middle East peace talks. One quiet Sunday afternoon while Egypt's Sadat was in the US, we got a highly classified intelligence report that there was an assassination plot against him. We in the watch office and the operations center debated about whether we needed to tell Kissinger, who of course was in negotiations with Sadat. We decided we should tell him. He was in the State Department building, and his secretary said to come down and brief him.

Because the report was so highly classified, State Department rules were that you had to carry it in a locked briefcase, even if just walking a few yards from the Operations Center to the Secretary's office. So, I took my locked briefcase down to Kissinger's office. His secretary said he was meeting with Assistant Secretary Phil Habib in a small conference in the back of his office suite, where they were discussing the peace talks with each other. I went back and found them. I started unlocking my briefcase to show them report, and Kissinger said, "Just tell me what the report says." So, I said, "There is an assassination plot against Habib." Phil Habib looked up at me incredulously, and I said, "No, no, I mean against Sadat." And they said something like, "Okay, thanks." and that was it.

Sadat, of course, was not assassinated then and not for several years afterwards, but he lived under constant threats of assignation for all those years. As far as I know, Phil Habib only lived under an assassination threat for about ten seconds.

Raise the Debt Ceiling

I am aghast that the US government continues to threaten to quit paying interest on its debt. While it is mostly Republicans, the straight vote last week in the House on whether to increase the debt ceiling was defeated with many Democrats joining the Republicans. I thought this was terrible. The Republicans said it was just a joke for show and that Wall Street was in on the joke. Afterwards, bond prices rose and interest rates fell, indicating that Wall Street was not concerned. I don't get it.

This Reuters article says the Chinese are concerned. It would seem that we should be concerned, too, if only because the Chinese hold $1 trillion of our debt. In theory we have the Chinese over a barrel because of the old MAD theory (Mutually Assured Destruction). If the Chinese destroy the US dollar, they lose their trillion dollar investment. But in this case, the US is threatening to take the first MAD step by destroying the value of its own currency.

The Republicans say that maybe nothing bad will happen, that the US can stop paying interest for a few days or weeks and then, when the budget negotiations are finished, it can start paying again like nothing ever happened. Maybe. But the Chinese analogy to playing with fire is apt. We don't know for sure what will happen, and we might burn our own house down. Why would we want to even risk the possibility of that?


Another possibility is that Treasury would take the money to pay interest on the debt from Social Security and government pension funds. As a retiree this really ticks me off. As a Vietnam veteran, I support shared sacrifice, but this is like the draft during the Vietnam war and voluntary military service in Iraq and Afghanistan now. There is no shared sacrifice. Only the fools sacrifice because of some insincere patriotic appeal, like Sarah (Paul Revere) Palin's. Sarah Palin gets rich, while the redneck grunts in the Middle East die. In this case, the ordinary retirees will sacrifice so that we can pay interest to Chinese millionaires and American billionaires in New York who wouldn't lift a finger to defend the US, although they were the ones attacked on 9/11.

Coburn Withdrawal Bad Sign for Debt

Sen. Tom Coburn's withdrawal from the gang of six working on the budget/debt ceiling crisis is a bad sign. I was never convinced that he was committed to the process, but now he certainly is not. He probably came under heavy pressure from his fellow Republicans to drop out. They probably plan to push the debt ceiling issue to the limit. Pundits say it may not destroy the country, but there is a possibility that it might. As somebody said today, why would you want to test whether it will destroy the country, if there is even a slight possibility that it might, and if you could easily avoid doing so.

Yes, we need to bring down the deficit and start paying down the debt, but we shouldn't default on our debt payments and undermine our credit in the process.