Yes, the Bush administration won a victory in the House Ways & Means Committee yesterday, with the 19-17 vote to enact the Jenkins version of capital gains tax treatment. And it's still likely the President later this year will get a good bill, of one version or another, after a lot of pushing and shoving on Capitol Hill. But it's not going to be easy.
As we worried in early August, the liberal high priests of the Democratic Party worked mightily during the recess to revive opposition to the capital gains cut as a Party Issue. We'd urged the Bush economic team to have the President make a few speeches in August commending Ways & Means Chairman Dan Rostenkowski and House Speaker Tom Foley, for the compromise they offered prior to the recess -- to cement them into this position during the recess. The decision was made to pass on this and have the President enjoy August playing golf and tennis. Again, in late August, I worried that the stock market would decline after Labor Day on the return of Congress because there was nothing done by the Bush team on this count and the Democrats would be working their moderate wing like crazy.
By one reliable estimate, during the recess the liberals recouped 25 votes that had slid away from them — and are getting close to being able to defeat capgains on the House floor. The liberal theologians hate and loathe the idea of a lower capital gains tax, the way Dracula hates the crucifix, garlic cloves, and sunlight. As the National Journal put it September 2, "Though Democrats may well lose the battle over capital gains tax cuts, it's a fight that party leaders, pollsters, and pundits think the Democrats should take on."
Now the President will have to mobilize if he is to win, dividing the Democrats on this party issue. OMB Director Richard Darman, the administration's strategist, must now certainly realize the inside strategy he has been following has run out of room, and he must go outside, the President accepting the Demo challenge and stumping for his proposal. If he can win in the House, there is every likelihood that he will not only win in the Senate, but may also get the IRA plan floated by Finance Chairman Lloyd Bentsen this week as an alternative to the capgains cut. We can't even guess the likely shape of the final version at this point. It could be disappointing, but it's also possible that President Bush, in being forced to fight again for what he thought he had won in his presidential campaign, will get more of it from Congress than if he had settled for an inside, negotiated compromise. But he has to go to the country and make the correct, populist arguments for it, as he did in 1988, not the sterile pitch favored by Treasury Secretary Nicholas Brady that a lower rate is needed to encourage long-term investment. The lower rate is needed to attract capital from those who have it to those who don't, from the rich to those who aspire to be rich, from the old to the young, from white old money to entrepreneurs of all colors.
The stock market jitters are almost entirely due to the new perils facing capgains. The junk-bond wobbles relate to the new rules forcing S&Ls to disgorge themselves of junk-bond holdings over the next five years, which is further shrinking the value of S&L assets and driving up the taxpayer costs of the bailout. We expect the junk to smooth out, though, as new issues slow until the disgorged bonds are absorbed. The stock market will snap back if George Bush puts on his 1988 Superman suit, coaxes "read-my-lips" speechwriter Peggy Noonan out of retirement, and gets back on the campaign trail.