Friday's Afternoon Rally Jude Wanniski July 28, 2003

The late afternoon surge on Wall Street Friday was widely attributed to various bits and pieces of news that had come out that morning. We did not see the cause until we learned Saturday morning that House Ways & Means Chairman Bill Thomas had unveiled his plan on how to deal with the World Trade Organization`s threat to slap $4 billion in penalties on U.S. exports. We have known for several months there was no denying U.S. export subsidies through a government sales corporation were in blatant violation of WTO rules. Something had to be done this summer to avoid the penalties, which would fall on specific industries. 

What delightful news from Ways & Means that Chairman Thomas would replace the export subsidies with a string of supply-side tax cuts that would benefit the entire national economy! Early speculation was that there would be new attempts to slip other subsidies past WTO. The move reminds us of the demands on Ireland four or five years ago that it stop taxing foreign investments at lower rates than domestic investments. Ireland shocked the Eurocrats by lowering the domestic tax rates to the foreign levels, instead of vice versa. It got Ireland`s economy onto the fast track.  

Here are the elements of the plan, as reported in the WSJ this morning:

• Reduces top corporate-tax rate for small and midsize manufacturers to 32%.
 
• Provides manufacturers with alternative-minimum tax relief.
 
• Extends and expands the research-and-development tax credit.
 
• Shortens depreciation schedules for domestic manufacturers.
 
• Extends bonus write-off for new investment, for all businesses.
 
• Allows manufacturers to carry back 2003 losses for five years and get refunds on prior tax payments.
 
• Allows companies to repatriate foreign earnings for a six-month period at a tax rate of about 5%.

Will the plan pass as presented? Probably not exactly, but it seems obvious that something has to be done on the WTO issue, and this plan is about as good as it could get. The WTO cannot object to lower tax rates that are general in nature. As Shailagh Murray reports in the WSJ, "at least some of the ideas stand a fair chance of catching on."

In all likelihood, this is the kind of positive "bolt from the blue" that could help carry the Dow Jones Industrials to 10,000 before the year is out. It further reinforces our view that supply-siders at Treasury and in the relevant congressional committees are not only in the ascendance, but are dominant. We will send updates as they come to us.

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