As I noted last Friday, the Breaux amendment that would have eliminated any chance of getting a cut in the dividend tax failed by a 2-to-1 margin this afternoon. It now appears almost certain that a House-Senate Conference Committee will be able to report out something close to $700 billion for tax reductions, which cannot be killed with a filibuster. That means there may be enough money to outright kill the double-tax on dividends with a simple majority in the Senate. It is now quite possible that the decline in the gold price and the smart advance in equities we've seen in the last week was primarily do to this measure sneaking its way through Congress. It certainly helps that the war in Iraq is going according to the military plans, but this week`s huge rally could not have been driven simply by news on the war front. Today's rally was absolutely driven by the news from the Senate floor, where the best the opponents of tax cuts could do was cut $125 billion from the $725 billion reported out by the Budget Committee. If the conference splits the difference, getting to $665 billion or so, there will be almost enough for the complete elimination of the dividend tax, which I`m told costs about $350 billion on static scoring.
Remember, my concern has been that if the war would go badly, with costs rising, the President would not be able to get his economic program through Congress. He now may be able to get it up front, in the bag, no matter how difficult the war issues may become. The risks to the market of political terrorism are still there, very real, but the core of the growth program seems now likely to become law.
Hats off to Sen. Don Nickles of Oklahoma, the chairman of the Budget Committee, after 25 years of supply-side resistance from Pete Domenici, and to Treasury Secretary John Snow, who has been brilliant in his advocacy of the tax cuts and tireless in his lobbying of doubters on Capitol Hill.
More news for next week: On Tuesday the Congressional Budget Office is going to release a semi-dynamic score of the budget. It will probably do four different models, including some with a really negative dynamic -- i.e., increased interest costs will have a net negative effect on the budget, and also some positive effects. The Administration will then announce it`s dynamic score of the tax plan. None of this will be officially put into the scoring process, but it will be used rhetorically. More importantly, it represents a tectonic shift in the way these issues are discussed in official Washington, which is big news for the years to come. The Laffer Curve lives.