A Capital Gains Deal
Jude Wanniski
April 20, 1989


"In the last week, the chances of getting a cut in the capital gains tax have risen astronomically," OMB Director Richard Darman has been telling people in Washington this week. Darman is exactly right, and I'm sure much of the Wall Street gains reflect a similar perception spreading in the markets. In my Tuesday/Wednesday visit to DC, I found the chemistry at the White House, Treasury and CEA astonishingly upbeat on the issue compared to my visit two weeks ago. When I confronted a senior Treasury officer with reports that Nick Brady had been cool to capgains chances this year, he simply asserted that this has changed, as evidenced by Brady's performance on "Meet the Press". More persuasive to me was the official's insistence that the administration had to be successful in getting capgains this year or the budget process would lead to tax increases next year.

There are several reasons for this shift. First is the realization that Darman had not given up on the capgains objective. While the Democrats may think he gave it up to get his budget resolution, a perception that filtered into The Wall Street Journal's editorials last week, Darman believes the dynamics of getting budget reconciliation four months from now heavily favors its return, when Democrats find how difficult it will be to find $5.3 billion in new tax revenues, and how easy it will be to cave in on capgains instead. The administration retains the hammer of sequestration if an agreement cannot be reached on the details. He dismisses the idea of a gasoline tax as part of the deal.

I sat next to Senate Finance Chairman Lloyd Bentsen Wednesday at an Evans&Novak forum lunch, and he spoke casually about the process that could lead to a deal, saying it could be done if revenues could be found "in the out years." There is now only agreement that capgains will produce revenue gains in the first year, from the "lock-in" effect. I asked him about the Democratic assertion that capgains could not be opened because of the pact on the '86 tax reform, and he said he wasn't worried about that. Bentsen has been a longtime supporter of lower capgains taxes. When asked what price would be asked by the Democrats, he grinned and said he would not reveal that at the lunch.

A second reason for the shift is the realization that President Bush really wants to win on this and believes he can. We're reminded that he served on Ways&Means, that his best friend in the House was the late Rep. Bill Steiger of Wisconsin, who inspired the capgains cut of '78, and that Rostenkowski feels like a brother to Bush at a personal level and wants him to succeed as President. The sense of demoralization among Democrats, especially the liberals, over the collapse of Speaker Wright's standing, further contributes to a sense that the Democratic Congress cannot refuse a President who campaigned on capgains, who now has a 70% approval rating in the polls, and who would blame the Dems in '90 if they did not give him capgains and a recession ensued. The President is already plugging for the cut in meetings with organized labor and HUD Secretary Kemp has begun a campaign to sell the idea to black leadership, having already gotten the support of the Black Caucus for a zero capgains in his enterprise zones bill.

In two meetings with Darman this week I found him a different man, as if liberated intellectually and physically by his agreement on the budget --an agreement that seemed almost impossible at the first of the year. I'm reminded once again of Peter Graves as Mr. Phelps on Mission Impossible, Darman planning a range of initiatives that will engage a Bush economic team that suddenly seems remarkably unified in spirit and ideas (with the usual few exceptions at Treasury). Do not believe what you read in the papers about Bush abandoning the Reagan legacy and changing into a Rockefeller Republican. He may seem kinder and gentler in style, but on substance he suddenly seems as tough as Ronald Reagan.