Chairman Chuck Grassley of Senate Finance has been responsible for the recent big waves in the market, the man on the margin regarding the fate of the President`s tax bill. On Friday, he gave a taped interview to MSNBC that ran in the evening hours after the market closed, but during the day the station ran periodic clips to advertise the show. It appeared from the clips that Grassley was saying there was no way to pass the President`s proposed end to the double-tax on dividends, and that maybe what the economy would need to get it moving was a "tax rebate." The Dow Jones Industrials ran off 134 points with this cold water. It only added to the confusion we noted last week in the Wall Street Journal`s confused report that Treasury Secretary John Snow was throwing in the towel, not only on the dividend tax cut, but perhaps also on the acceleration of the marginal income-tax cuts.
Grassley cleared up the confusion on "Fox News Sunday," saying he personally believed the economy needed the entire package the President presented, price tagged at $726 billion over ten years. He also said the President could get $550 billion if he could change two votes in the Senate, it did not matter which party. And even if he could not do that, said Grassley, he believed he could get two GOP holdouts, Olympia Snowe of Maine and George Voinovich of Ohio, to vote for a $440 billion tax package, up from the $350 billion they say is their max, if he could find $90 billion in offsets, including the closing of some tax loopholes. Grassley was on C-SPAN this morning making similar upbeat comments, underscoring the view that the fight is far from lost, which I believe is the reason for the market regaining all that it lost on Friday.
One of the most interesting of the weekend developments was Sen. Lindsey Graham`s arguments for the cuts in capital taxation on CBS' "Face the Nation." The freshman South Carolina Republican said he would not vote for a tax bill that did nothing to expand the economy, insisting that the President`s package would do that and a watered-down package would not. If Congress would only approve $350 billion, the elements of the package would be "social" tax cuts that really do not amount to much more than putting money into people`s pockets. It is just such "tax cuts" that give supply-siders a bad name -- which is what I argued in 2001, when the Bush "tax cuts" did little more than hand out free money to taxpayers.
Some of you will remember Lindsey Graham as a guest at a Polyconomics client conference three or four years ago after he played a key role in the House impeachment of President Clinton. Last November he won the Senate seat vacated by Strom Thurmond. He may be a key player in the Senate deliberations that will unfold, now that Easter recess is behind them. He correctly points out that in the next decade federal tax revenues will approximate $25 trillion. The tax-cuts on the table are a few pennies on the dollar compared to that large number, which would be significantly larger if the double-tax on dividends were ended. He also should be pointing out that state and local revenues will immediately expand if the double-tax were ended, jumping especially on increased capital gains revenues when the DJIA leaps up by 1,000 points.
The tax issue will be front and center in the days just ahead. So far every Democratic presidential candidate is mired in a balanced-budget mode. The one suspicion still out there is that President Bush may be happy to settle for the "issue" going into his own re-election campaign, rather than get the tax cuts. Remember all the talk about how Grassley fouled up by promising Snowe and Voinovich he would not report out a tax package of more than $350 billion, which caused screams of anguish from the House Republican leaders. It is now clear that had Grassley not done so, there would be no Budget Resolution and little chance of any growth-oriented tax-cut on capital passing. Treasury staffers are now acknowledging that what at first looked like a train wreck now seems to be producing the goods, or at least an opportunity for the administration to change some minds, if it really wants the tax bill and not just an issue.