The "Duck Watch" editorial in yesterday's Wall Street Journal and today's "Capital Gains Sellout" catch the spirit of OMB Director Richard Darman's negotiations with Congress on the Gramm-Rudman budget ceiling. Darman, driving hard to put together a deal in order to avoid a sequestration later this year, has put President Bush's capital-gains tax cut proposal on ice. As it happens, one of Darman's great strengths turns out to be a weakness: his determination and skill as a legislative dealmaker has kept him on this negotiating track — even though the President's interests lie in avoiding any deal that sidetracks his capital-gains proposal. Treasury Secretary Nick Brady, who gave up on the proposal for this year practically on Inauguration Day, has not helped a bit, ready to capitulate to congressional Democrats in the hopes that pragmatism will win him points on the Brady Plan and S&L cleanup. Still, capital gains is Darman's baby.
It would be nice if the President congratulated Darman for his achievement, but said "no thanks", sending him back to the trenches with orders to bring back a capgains cut as part of the deal. There are a few White House advisers urging this course. It will be extremely difficult to win on capital gains this year or next if it isn't sold as a revenue-raiser, a key ingredient in the Gramm-Rudman mandate. President Bush has a natural advantage in this year's budget struggle: Democrats believe he would allow sequestration. President Reagan didn't have this advantage because he was not prepared to accept the implied defense cutbacks of sequestration; the lessened defense threat from Gorbachev's USSR works to Bush's advantage here. Democrats do not want sequestration. They want the pork, Pentagon pork and all. They would force the leadership to swallow the capgains proposal, and the funds it would liberate; except for the liberal intellectuals in the party, there is no logical reason to oppose the tax cut, which, after all, was part of the Bush platform in '88.
A sticking point for Darman and Brady has been the ferocious opposition of Ways & Means Chairman Dan Rostenkowski, who insists that treatment of capital gains as ordinary income was part of the 1986 tax reform. Senators Packwood of Oregon and Bradley of New Jersey, who were also part of the '86 package deal, have made similar arguments. If capital gains is cut to 15%, marginal rates on personal income have to go back up to 38%, they have argued. My point to both senators is that a deal in one Congress cannot bind future Congresses if there has been an intervening election. The electorate, having spoken in '88 with a clear division on the issue between George Bush and Michael Dukakis, has nullified the deal. The concept is force majeure. "Actually, it's not a bad argument," Packwood wrote in a note to me this week. Senator Bradley has also indicated to me that he would at least review his position in light of force majeure. He alone could turn Rosty around.
Darman insists he has not given up on capital gains, that his incipient budget deal with the Democrats leaves sufficient room to pursue the capital-gains agenda. We can't know precisely what he has in his head, but are reminded that it is very difficult to overrate his skills. Just as Jim Baker will seem a loser if his congressional deal over the contras does not bear fruit, so too Darman realizes he has to pull a rabbit out of the hat on capital gains or he'll be seen to have dealt away the key plank of the Bush agenda for trivia. At the least, a floor fight over capital gains this year would give the GOP an issue in 1990 if recession is in the air, blaming the Democrats for denying the Bush mandate. For these reasons, we hardly think this is the end of the issue, but rather an early, important skirmish.