There's almost total confusion surrounding capital gains and the reconciliation bill. But as long as the administration's chief strategist, Richard Darman, sees things clearly, prospects for a permanent capgains cut at the end of this muddy road remain high. He tells me there may be as many as 60 votes for capgains in the Senate on substance, although not enough on procedure. "As you look down at the chessboard," I asked, "do you see a way to win?" He smiles broadly, "Yes, I do."
There is now nothing more important going on than the capgains struggle. If it clears, we can count on the economy expanding right through President Bush's re-election in 1992. The gains will be far greater than any of the official estimates. The stock market will advance to loftier plateaus. The Fed will have to chop short-term rates to keep the dollar from booming. The Christmas season will be merry for retailers. The revenue gains next year will surpass even Darman's expectations, reducing tax pressures on the 1991 Gramm-Rudman target.
If Darman is checkmated by the Senate Democratic leadership, we'll see a weaker stock market and economy. The Fed will have to resist pressure to ease, and if it can't resist, gold and commodities will rise in price and so will interest rates. Federal revenues will slide, making it even tougher to hit G-R targets next year, and we'll hear a new drumbeat for higher taxes. President Bush will be able to complain throughout that these problems would not have occurred if the Democrats hadn't thwarted his electoral mandate for capgains, as well as the clear desires of Congress, through procedural machinations. But that scenario is no substitute for the added output that the market has rightly been anticipating with a capgains differential. I've urged the White House to have the President make it clear that even if he wins a partial victory on capgains, he still believes a 15% permanent rate is the appropriate number to insure the country's entrepreneurial competitiveness for the rest of the century -- and the GOP will run on the issue in '90, and if necessary, 1992.
I've also complained again that the administration is still not making a decent case for capgains. The Gallup poll this week reports that Americans queried would rather have an IRA than a capgains cut. But Gallup did not ask them what they would prefer if they knew an IRA exclusion would increase the budget deficit and capital gains would lower the deficit! Michael Boskin, the President's chief economic advisor, tells me that of 13 recent independent studies of the revenue effects of a 30% capgains differential, 9 estimate higher revenues over the 10-year budget horizon than does Treasury's Office of Tax Analysis, even without any feedback effect on economic growth! And even OTA says cumulative revenues over the 10 years will be greater with than without the differential. If I were Bush, I'd be stressing this point, ridiculing the analysis of the Congressional Joint Committee on Taxation's analysis, even ridiculing the Treasury's ultra-conservative analysis. Treasury Secretary Nick Brady has been doing just that, pooh-poohing his own department's analysis. The press corps will not report this until the White House makes an issue of it, which is the only way to get the arguments to the public at large.
In the 1986 tax reform, a partisan deal could be cut because the liberals were getting rid of the capgains differential they hate. There's little chance for President Bush to win/without being tougher on the liberal theologians than he has so far. The stakes are very high. He should be pulling out all the stops.