The New York Times front page this morning reports the high likelihood of a cut in the capital gains tax this year. Indeed, one of the reasons the market has come back from its October 13 plunge has been the steady reports from the White House that it will be pushing capgains again, and from key Democrats, who have been sounding more agreeable to compromise. This is not entirely true. Senate Majority Leader George Mitchell is as hostile as ever. But Sen. Lloyd Bentsen, chairman of Senate Finance, has been showing signs of peeling away from the procedural gridlock Mitchell had arranged. House Speaker Tom Foley is also overriding the opposition of Majority Leader Richard Gephardt, who is Mitchell's House counterpart in opposing capgains. The larger questions have to do with the kind of package the administration is willing to settle for, and what the trade-offs will be. OMB Director Richard Darman has done a masterful job of maneuvering the fiscal '91 budget into a shape that makes it all the more difficult for the congressional liberals to use their procedural muscle to deny this very popular president a Senate vote on capgains.
A new complicating wrinkle has appeared, though, with the proposal of Senator Pat Moynihan (D-NY) to take the Social Security Trust Fund off budget, so the enormous surpluses building up in that fund no longer hide even greater deficits in the general fund. Moynihan, who has the support of Senator Phil Gramm (R-TX) and House Minority Leader Newt Gingrich, wants to then cut Social Security payroll taxes to reduce the size of that fund's surplus. The surplus is mushrooming because the Greenspan Commission, on which Moynihan served in 1981-83, assumed a fairly dismal demand-side economic scenario for the decades ahead as the basis for the actuarial projections. The Reagan supply-side expansion has created a similar boom in private pension pools.
On the other hand, Darman, CEA Chairman Michael Boskin, and a band of conservative tax writers on Capitol Hill, are adamantly opposed to taking Social Security off budget. The general fund deficits, which they have been whittling away under Gramm-Rudman pressure, will balloon again without the Social Security surpluses. They fear this will bring renewed pressure on President Bush to raise income taxes, given the limitations on spending cuts. They prefer the higher payroll taxes to higher marginal rates and see the Moynihan proposal as a Pandora's Box that will unravel their economic and budget strategies for the next several years.
This begins to look like a potential tradeoff: A cut in the capgains rate plus a payroll tax cut, pressed by the Democrats with considerable backing from GOP conservatives, yet resisted by the White House because it would have to be accommodated by higher taxes elsewhere. The U.S. Chamber of Commerce is supporting the White House on these grounds. GOP congressional leaders like Gingrich, though, do not want the Democrats proposing a Social Security tax cut with the GOP opposing. So as we see, it is not going to be an easy matter to work all this out, as the Times implies. Darman, Boskin and Senator Packwood's people, whom I met with last week to discuss these matters, all seemed very edgy about how things will go, not pessimistic, but uncertain. The new variable they have to deal with, the Social Security proposal, makes the chessboard look that much more complex to the administration strategists. We tend to favor the Moynihan proposal, on the grounds that Social Security is in fact overfunded. For this very reason, Jack Kemp pledged a payroll tax cut in his '88 campaign. Darman and Boskin are right in seeing problems, but we think they can be worked out. We will soon be advising how.