Today's Market Dip Jude Wanniski May 19, 2003

Today`s sharp Wall Street decline, coupled with the $10 jump in the gold price to $365/oz., is a sure sign that things are not going as well as they should on tax cuts and the Bush administration is opting for a weaker dollar to goose the economy along. Treasury Secretary John Snow`s comments accepting the idea of a weakening dollar point in that direction. Real deflation may be behind us, but real politics are not, and it may be that while things may improve on the tax front, bets are being hedged. 

What has changed since Friday, when we analyzed the "tax smorgasbord" on Capitol Hill, is that Republicans are getting used to the idea that there won`t be a tax package much bigger than $350 billion to survive a House-Senate conference. It is also clear the conference will be kicked past the Memorial Day weekend and a July 4 target set for final passage and the President`s signature. There is scheduled this afternoon at 5:30 ET a meeting at the White House with President Bush, House Ways & Means Chairman Bill Thomas and Senate Finance Chairman Chuck Grassley, to look over the smorgasbord and make some decisions on how to proceed. One option is to have the House amend the Senate version into a $550 billion package and send it back without a conference, and hope it could somehow get the votes to pass as is. 

As the Senate parliamentarian may say such a move may be subject to a point of order, chances are it would be kicked back to the House without a clear vote. Because there are quite a few Republicans who are insisting that $350 billion is too little, the trio meeting tonight may agree that the House may have to be persuaded that`s all there is going to be. Sen. Mitch McConnell [R-KY], who is in the leadership, said as much on the Sunday talk shows. The Senate conferees appointed Friday were originally going to be three Republicans to two Democrats. When Republican Trent Lott and Democrat John Breaux were added, it was taken as a sure sign the "offsets" that might have ballooned the Senate package to $440 billion would be stripped out, as Lott of Mississippi and Breaux of Louisiana insist the provision on taxation of Americans working abroad be dropped in conference. The oil and gas industry is horrified at the costs the provision would mean. That will not leave much room for the kind of package the optimists have been counting on. 

What could we expect in a smaller package? If the House acceded to the Senate "gimmick" to eliminate the double-tax on dividends, but "sunset" it to reduce its cost, they would have to come away with something to show for their efforts. This might mean the 5-15 combination of rates for dividends and capital gains might go to 8-18, which we recall were the original rates floated by Thomas some weeks ago. Because lower capgains rates would be scored to produce revenue in the first two years, that provision would not cost that much if it were tacked on to the sunset provision of the dividend tax cut. This is pure speculation that I`ve picking up by telephone and e-mails from Washington today, but they are informed guesses on what MIGHT happen. 

The week also begins with heightened anxieties in Iraq and the Middle East, with chaos getting the upper hand what may yet become an Iraqi quagmire and the renewed suicide bombings in Israel as the "road map" to a Palestinian state looks even more tattered. It is no wonder investors are taking the day off.