August 1, 1981
President Ronald Reagan, The White House, Washington, D.C.
Dear President Dutch:
I hope you don't mind me addressing you this way. I know it's a little informal, especially since we've never met. But I sure feel like I know you, and not just because I've seen you in the movies. Fact is, I've been hearing about you a lot longer than you've been in the movies. Sterling, Illinois, is where I'm from, Mr. President, in Whiteside County not fifteen miles from where you were born in Tampico, and I've been there and to Dixon, where you were raised over in Lee County, maybe ten thousand times in the last 65 years or so.
Anyhow, the reason I called you "Dutch" up above is because that's how I've heard you called all these years, even though you're no more Dutch than I am. Actually, people call me "Swede," even though my proper name is John. Some newspaper writer hung that nickname on me when I played semipro ball as a kid. "The Sterling Swede," he called me, after I hit a homer one day with the bases loaded. Not that I was ever really that good. I did bat .310 one year, but I slowed up a whole lot after my foot lost an argument with an axe while I was chopping wood on my mother's farm. I liked playing ball, though, even though I never made it to the majors. I don't think I ever heard you broadcast the Cubs games. Always rooted for the White Sox myself. Never paid much attention to the Cubs. Still don't.
What this letter started out to be about was taxes, and that's something I know plenty about, having paid plenty of them. My mother's brother owned a machine shop in Rockford and helped put me through college after my Dad died. Mother wouldn't leave the farm and he helped out with that, too. When I graduated from college in Urbana he took me into his business. Things went pretty well for us, but one year my uncle got into a big fight with the government over taxes. He got so mad when he lost that he swore he'd never trust another lawyer who wasn't related to him. So he sent me back to Urbana, to the law school. Then I came back and helped him run the business, and I wound up owning it after he died, and my Mother's farm, too. So I've run a couple of small businesses and ought to know what I'm talking about.
Anyhow, taxes. You've said many times you're down there to change things, and I hope you mean it. There sure is plenty that needs changing. For starters, I wish you'd change everybody above the level of junior file clerk in the IRS. I know you probably can't do it, but if you can I don't mean just to get rid of Democrats. Everybody who's been there more than a month gets to thinking the same way about taxes and that's one of the things that's wrong with us. They're all so smart about that damn Code of theirs. They know what's in it, they make up what it means when they don't, and in general they act like the money they leave us is just being passed up temporarily until they get around to figuring a way to take that, too. Well, anyhow, I guess you can't do that, so at least you ought to make sure that the laws the IRS is paid to enforce make some sense. I'm not just another loudmouth who doesn't think I ought to pay any taxes, Mr. President, but some of the things I see now just don't make any sense to me.
The kind of tax tonic we need is the kind that will make it easier for ordinary people to save more money. And more attractive to risk it in starting small businesses like mine that make jobs for lots of people. Right now it's too tough to accumulate capital if you work for a living. Why can't we have a tax-free "personal capital account" that lets a young person accumulate a certain amount of money just once in a lifetime without paying any taxes on it? We could start out with a small amount of money, say $10,000, and built it up until it was $100,000. But the real incentive would be that any capital gains you made by risking the money in your account would also be tax-free. That would give everybody a chance to have a stake in our free enterprise system, a chance most people don't now have.
But that won't help if the government doesn't stop discouraging people from taking risks in starting their own companies in the first place. Our whole risk-reward system is cockeyed, Mr. President. It takes me two phone calls, one to buy and one to sell, to make money on Consolidated Conglomerates, a big publicly owned company. It takes me a lifetime of sweat and effort to keep our machine-tool business or our farm going. But when I sell either the machine-tool business or the farm, I'll pay exactly the same capital gains tax rate on my profit as I pay when I sell shares of Consolidated Conglomerates. If that isn't a case of government telling me not to invest in small business, in a business that's not on a public stock market, I don't know what it is.
I don't buy the idea that we ought to give up on the capital gains tax. If we've got any really rich people in Whiteside County, they keep it well hidden. But I handle enough wills and estates to know that we have some who can afford to live off investments. How can we say to everybody who isn't lucky enough to do that -- to the farmer, the mill hand, the secretary, the widow who takes in sewing to make ends meet -- you have to pay taxes on what you make, but people who live on investments don't have to? It just won't fly, Mr. President, not even out here.
What we can do is keep the capital gains tax rate down low on the first $100,000 a year of gain. By "down low" I mean at about the rate someone who earns $50,000 a year in working income would pay. After that the government could take a little more. But if the gain was made by investing in an operating business with no more than 500 employees (that's a small business, nowadays), and if the money had been kept in the business for at least five years, I'd tax it at half the rate that would otherwise apply. Let's make it worthwhile for people to take risks. That's the name of the game.
Most of us don't care how rich other people get if they do it by taking risks, or if they stay rich by continuing to take risks. But to get rich without taking risks? That's not free enterprise: It's sterilizing capital, capital that ought to be at work making jobs for people.
I like the notion of applying two principles from the way we tax buying and selling homes to buying and selling small businesses. The first is what they call the "rollover." If you sold a small business or an interest in one and reinvested the proceeds in another one within 2 years, the government would defer the tax. And once in your life, if you'd put in at least 10 years as the owner or part-owner of a business in which you really worked, I'd let you sell it with no tax, at least up to some figure like the $600,000 they're talking about raising the estate tax exemption to now.
I'd also make a difference in the estate tax treatment of a business that was kept in the family or sold to the employees and a business sold to a big company. We don't need any more mergers, Mr. President. We need to keep small companies free.
Only about 7 out of 100 Americans are self-employed, but 7 to 10 times that many say they'd like to be. A lot of them keep trying and failing at it again and again. The way the tax laws work now just makes it too hard to acquire a grubstake, to help start somebody else out with it, or to keep a family business or farm independent and in the family.I'm sure the people at the Treasury Department will tell you that all these ideas are silly, that they'll cost too much money, or that they can't be administered. Those arguments are always used to fight change. We need changes like these, Mr. President, to give as many Americans as possible a shot at entrepreneurship and self-employment. You said you wanted to see us make a new beginning, and I think laws like the ones I'm talking about would help.
That's enough for now. But please, President Dutch, listen to us. We need your help, and we can help the country. I'll be watching to see what happens.
Editor's note: The letter above isn't real, nor is the writer. But the issues raised are.